Credit crisis fallout is limited, Fed says

From the Associated Press

A painful credit crunch is taking its worst toll on the already ailing housing market, but its effect on the rest of the national economy at least so far seems limited, the Federal Reserve reported Wednesday.

The Fed’s survey of business conditions around the country was closely watched for clues about what the central bank might do with interest rates Sept. 18 at its next regularly scheduled meeting.

A growing number of economists believe that the Fed will lower a key interest rate now at 5.25% by at least a quarter of a percentage point to protect the economy from any ill effects of the credit crisis.

The Fed hasn’t lowered this rate in four years.


“Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited,” according to the Fed’s report.

Credit problems -- which started with “sub-prime” mortgages held by people with spotty credit histories or low incomes -- have spread to more creditworthy borrowers. Those problems intensified in August, unnerving Wall Street and investors around the globe. To stabilize the situation, the Fed has pumped tens of billions of dollars into the financial system and has sliced an interest rate it charges banks for loans.

Fed Chairman Ben S. Bernanke, in a speech Friday, pledged that the central bank would “act as needed” to limit any fallout on the economy from the credit crunch. He made clear, though, that the Fed’s decision would be driven by what was best for the economy. The Fed would not bail out investors and lenders “from the consequences of their financial decisions,” he said.

In Wednesday’s survey, the Fed said, most banks reported that the recent developments in financial markets had led to more restrictive lending standards for people wanting to obtain mortgages, which “was having a noticeable effect on housing activity,” the Fed said. “The reduction in credit availability added to uncertainty about when the housing market might turn around.”

A separate report Wednesday helped paint a bleaker picture of the housing market.

The National Assn. of Realtors said pending sales of existing homes plunged 12% in July to their lowest level in six years. The Washington-based trade group attributed some of the decline to mortgages falling through at the last moment.

The drop in the number of real estate contracts signed and expected to close in the succeeding 30 to 90 days was much bigger than the 2% decline economists had expected for July.