Chairman Bernanke Reports to Congress

Today, Federal Reserve Board Chairman Ben Bernanke presented the Semiannual Monetary Report to Congress before the House Financial Services Committee.  Most of the report discussed the deteriorating economy, noting that the Fed's balancing act now tips toward encouraging economic growth rather than  dampening inflation.  The Fed is striving to implement monetary policy "properly calibrated to foster our mandated objectives of maximum employment and price stability in an environment of downside risks to growth, stressed financial conditions, and inflation pressures."

Sluggish economic activity in the near term is almost a dead certainty.  There is substantial risk that " the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further."  Consumer price inflation has increased, so although Bernanke did not say it, we could be headed for a bad combination of stagnant economy + inflation = stagflation.

Bernanke noted that "monetary policy works with a lag," so it will be some time before we can determine whether the FOMC's aggressive reductions in the target federal funds rate of 225 basis points since last summer are accomplishing the desired results.

Other reportable items include:  1.  The Fed's proposed HOEPA regulations on which comments are still being received and evaluated.  After much berating by Congress, the Fed finally did get around to formulating proposed HOEPA changes.  2.  The Fed is engaged in informal encouragement to lenders to work with borrowers facing foreclosure.   It is difficult to make this sound impressive.  3.  Final Truth in Lending Act Rules should be forthcoming.  New credit card disclosures will be part of those rules.  4.  Separately, the Fed plans to use Federal Trade Commission Act authority to issue rules regarding unfair and deceptive practices by credit card issuers.

Link to testimony:  http://www.federalreserve.gov/newsevents/testimony/bernanke20080227a.htm

Link to other viewpoints about the testimony:  http://www.forbes.com/markets/feeds/afx/2008/02/27/afx4705136.html

(ag) Feb. 27, 2008, in Economy/Interest Rates