Inflation is on the rise, the subprime mess will worsen, along with the housing crunch, and the losses and damage from both will be worse than anyone expects. A US recession? Don’t want to say.
That was the troubling prognosis delivered by US Federal Reserve chairman, Ben Bernanke at a congressional hearing in Washington overnight. Coming on top of big losses from investment and other banks in subprime mortgages and more concerns about financial group balance sheets, Bernanke’s testimony was sobering.
Back in the middle of the year the Fed chairman estimated losses from the subprime mess at anywhere from $US50 billion to $US100 billion: events have shown that to be conservative. There are worries now that every US financial group with any involvement in the subprime mess, along with those who took the so-called credit derivates called CDOs, may be holding grossly inflated investments because of fraudulent property valuations.
Bernanke said estimates about financial institutions eventually losing $US150 billion as a result of the subprime debacle were ”in the ballpark”.
Although Wall Street recovered in late trading, it still finished lower and yields on US 10-year bonds still finished 4.30%, the lowest level for months as investors worried about what was said in Washington. US technology stocks, the main driver of the market’s recent strength in the past two months, also fell sharply.
Bernanke said the Fed expected growth to slow “noticeably” in the fourth quarter but downplayed fears of a recession, saying the central bank expects the economy to grow next year, but at a more moderate pace than in recent quarters.
However, it’s often the way Central Bankers say things that indicates deeper concerns. He told Congress that since the Fed rate cuts in September and on October 31, “financial market volatility and strains have persisted … Incoming information on the performance of mortgage-related assets has intensified investors’ concerns about credit market developments and the implications of the downturn in the housing market for economic growth,” Bernanke said.
That’s central banker speak for: ‘we tried to help bail you all out with two rate cuts, but it hasn’t worked.’
The Fed chairman got everyone’s attention when he started talking about inflation and higher oil prices. US motorists are paying unseasonally high petrol prices at the moment: over $US3 a gallon. That’s the level they were in July and August in the peak of the summer driving season.
He sounded a note of concern that the rise in energy prices – oil is now around $US96 a barrel – could lead to higher inflation and weaker economic growth.
“In addition, further sharp increases in crude oil prices have put renewed upward pressure on inflation, and may impose further restraint on economic activity.”
US analysts now reckon there will be another rate cut after the Fed’s next meeting on December 11.
US futures markets reckon there’s a 98% chance of that happening, even better odds than our rate rise this week: that was up from 70% at the start of the day.
Bernanke declined to specifically answer a question from a committee member about what, on a scale of 1 to 10, he thought the chances of a recession were. He also warned that delinquencies for subprime mortgage borrowers are likely to rise further but that the Fed will continue to work with community groups to help borrowers avoid foreclosure.