Fed Chief Focused on Keeping Economic Recovery Moving Forward

    As reported by the Associated Press, federal Reserve Chairman Ben Bernanke heads to Congress today with the message that The Fed is ready to take new steps to bolster the recovery if the economy worsens.  The recovery is losing momentum despite flashing signs of strength earlier in the year.  Many fear that the recovery may stall.

    Bernanke will probably downplay the odds that the economy will slide backwards but is expected to have a more cautious tone.  The Fed is likely to hold a key bank lending rate at a record low near zero well into 2011, or possibly into 2012.  The intent of this strategy is to strengthen the economy.  This would mean that rates on credit cards, home equity loans, adjustable rate mortgages, and other consumer loans would stay at their lowest point in decades.

    However, these historically low lending rates have not done much to stimulate the economy.  Consumers and business are being cautious and have no shown the desire to increase spending.  The Fed is also worried about deflation, even though the prospects are remote.  At The Fed’s June meeting, officials cut their forecasts for growth this year.  They also saw the need to explore new ways to energize the rebound – this marks a change from earlier in the year when they were moving to wind down support.

    If the recovery does deteriorate, The Fed could revive programs to buy mortgage secruities or government debt.  It could also lower the interest rate paid to banks on money left at The Fed, cut the emergency Fed loan rate that banks pay, or create a new program to spark lending  to businesses and consumers (with the hopes of a spending increase).

    These potential solutions do not come without risk, mainly inflation and an excess of speculation.  In February, Bernanke warned that if the rebound endured, it might not be robust enough to quickly lower unemployment.  He also began laying the groundwork for Fed rate increases once the recovery was firmly entrenched.

    Now, the focus has dramatically changed to keeping the recovery alive.  Any rate increase will probably not happen until 2011 at the earliest.

    What does this mean for the real estate industry?  I anticipate that homes will continue to sell, however, those who are happy where they are will be staying put for the immediate future.  Pricing should remain stable in the Philadelphia area, as the local economy is much stronger here.  Buyers, with the goal of finding something by the end of the fall, are starting to look and many distressed properties are being sold.  Both of these trends, if they hold, should push the local housing market towards a more normal state.

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