Extracted from Federal Reserve Chairman Ben S. Bernanke's testimony before the Senate Committee on Banking, Housing, and Urban Affairs.
1. Subprime mortage crisis is not the only culprit to responsible for the economic woes. Other factors include:
- A broader retrenchment in the willingness of investors to bear risk
- Difficulties in valuing complex or illiquid financial products
- Uncertainties about the exposures of major financial institutions to credit losses
- Concerns about the weaker outlook for the economy
2. Banks have become less willing to provide funding to other market participants, including other banks.
- More-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth.
3. The outlook for the economy has worsened in recent months, and the downside risks to growth have increased.
- The virtual shutdown of the subprime mortgage market and a widening of spreads on jumbo mortgage loans have further reduced the demand for housing, while foreclosures are adding to the already-elevated inventory of unsold homes.
- Further cuts in homebuilding and in related activities are likely.
4. Payroll employment, after increasing about 95,000 per month on average in the fourth quarter, declined by an estimated 17,000 jobs in January.
- The softer labor market, together with factors including higher energy prices, lower equity prices, and declining home values, seem likely to weigh on consumer spending in the near term.
- But exports may offers some hope.
5. To date, inflation expectations appear to have remained reasonably well anchored.
- But any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank's policy flexibility to counter shortfalls in growth in the future.
6. Baseline outlook envisions an improving picture after a period of sluggishness.
- But it is important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further.
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