Financial Update (Fourth Quarter 2008)

Fed Chair Addresses Fed Policies in Current Environment

photo of Fed Chairman Ben Bernanke Although the Federal Reserve has taken considerable steps to steer the economy through its current turmoil, it still has tools remaining to get the economy on an even keel, according to Fed Chairman Ben Bernanke. Speaking in Austin in early December, he said that the fed funds rate—currently set at a range of 0 percent to .25 percent—cannot go lower than zero. "The scope for using conventional interest rate policies to support the economy is obviously limited," he said.

Looking beyond the fed funds rate
Bernanke said that among the steps the Fed could choose to take in helping right the economy is the purchase of longer-term Treasury securities, which would increase the securities' yields. He noted the Fed's plans, announced in late November, to purchase up to $100 billion in government-sponsored enterprise (GSE) debt and up to $500 billion in GSE mortgage-backed securities over the coming months. "It is encouraging that the announcement of that action was met by a fall in mortgage interest rates," he said.

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Bernanke acknowledged that these plans involve increasing the debt on the Fed's books. "To avoid inflation in the long run and allow short-terms interest rates ultimately to return to normal levels, the Fed's balance sheet will eventually have to be brought back to a more sustainable level," he said. "The FOMC [Federal Open Market Committee] will ensure that is done in a timely way. However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy."

Homeowners Need Help Avoiding Foreclosure, Fed Chair Says

Rising foreclosures pose a threat to the economy, and Fed Chair Ben Bernanke recently proposed that the government take a more active role in stemming the tide of people losing their homes when such loss can be prevented.

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"The public policy case for reducing preventable foreclosures does not reply solely on the desire to help people who are in trouble," Bernanke said in a Dec. 4 speech. "Communities suffer when foreclosures are clustered, adding further to the downward pressure on property values."

New initiatives undertaken
Bernanke mentioned some organizations allied with the government that are working to reduce foreclosures. The Hope Now Alliance—a coalition of mortgage servicers, lenders, housing counselors, and investors—is working the U.S. Treasury and has produced guidelines that participating servicers have agreed to use as they work to prevent foreclosures.

The Federal Reserve created the Homeownership and Mortgage Initiative, which focuses on reaching community leaders and convening lenders, community development specialists, and policymakers to discuss the social cost of foreclosure. Bernanke also mentioned the FHASecure program, which provides long-term, fixed-rate mortgages to borrowers facing a rise in payments if their interest rate is about to reset higher. The Hope for Homeowners program allows lenders to refinance a delinquent borrower into a new fixed-rate mortgage if the lender writes down the mortgage balance to create equity for the borrower.

Helping homeowners helps the economy
Bernanke noted how intertwined the housing market and the overall economy are. "Actions to strengthen financial markets and the broader economy are important ways to address housing issues," he said. "As we as a country consider ways to address our financial and economic challenges, policy initiatives to reduce the number of preventable foreclosures should be high on the agenda."

Maintaining vigilance going forward
Bernanke looked to the future and the need for the Fed, as well as other agencies, to keep a watchful eye on the economy. "Working together with the Treasury, the FDIC, and other agencies, we must take all steps necessary to minimize systemic risk," he said. "We at the Federal Reserve and our colleagues at other federal agencies will carefully monitor the conditions of all key financial institutions and stand ready to act as needed to preserve their viability in this difficult financial environment."


December 18, 2008