Fed Chair warns of possible recession

[0:11] ..." the economy and intensified strains in financial markets. In recent months the Federal Reserve has eased monetary policy substantially further. And taken strong actions to increase market liquidity. My remarks today able first offer my views on conditions in financial markets and the outlook for the US economy. And then discuss recent actions taken by the Federal Reserve. Although our recent actions appear to have helped stabilize the situation somewhat financial markets remain under considerable stress. Pressures and short term"...

[3:34] ..." economic outlook Georgia have weighed on real economic activity. Notably in the housing market sales of both new and existing homes and generally continued weak. Partly as a result of reduced availability of mortgage credit and"...

[6:05] ..." businesses are enjoying strong demand from abroad. Although the prospects for foreign economic growth and diminished somewhat in recent months. Net exports should continue to provide considerable support to US economic activity in coming quarters. Overall"...

[8:21] ..." monitor inflation developments carefully in the months ahead. I turned out the federal reserve's policy responses to these financial and economic developments. Well functioning financial markets are essential for the efficacy of monetary policy and indeed for economic growth and stability. To improve market liquidity and market functioning and consistent with its role as the nation's central bank. The Federal Reserve has supplemented its long standing discount window by establishing three new facilities for lending. To depository institutions and primary dealers. The lending"...

[9:26] ..." predetermined aggregate amounts of longer term funding and preannounce states. With the interest rate in the distribution of the awards across institutions being determined by competitive auction. Although these facilities operate through depository institutions and primary"...

[9:56] ..." Stearns a large investment bank. On March 13 Bear Stearns advised the Federal Reserve and other government agencies -- the Securities and Exchange Commission. It is acquitted position has significantly deteriorated and it would have to"...

[11:27] ..." of such a failure for market functioning. And the broader economy. The Federal Reserve in close consultation with the Treasury Department agreed to provide funding to Bear Stearns who JPMorgan chase. Over the following weekend JPMorgan chase agreed to purchase Bear Stearns and assumed various financial obligations. The Federal Reserve has taken additional measures to improve market liquidity. We have initiated a series of 28 chasing a -- term repurchase transactions the"...

[12:34] ..." the financial conditions and funny positions of primary dealers who might seek Federal Reserve credit. Today the recent acquitted measures implemented by the Federal Reserve seemed to have been helpful in addressing some of the strains in financial markets. Funding pressures on primary dealers appear to be"...

[13:21] ..." you know in response to the further weakening of economic conditions the Federal Reserve has continued to ease the stance of monetary policy. The FOMC reduced its target for the federal funds rate by a total"...

[17:16] ..." of government intervention and -- but what about government intervention in the housing market admittedly each housing."...

[22:24] ..." people I would just like to say one thing which is the Federal Reserve has done a great deal to try to help on the housing front. Our interest rate cuts in our liquidity measures in particular have significantly reduce the interest rate reset problem faced by many mortgage holders and we have extensive efforts on the ground at our reserve banks and our branches"...

[23:29] ..." investment bank. Isn't it just is appropriate to do it in the housing market because that also prevents them as a whole presents systemic risk issues that's the dichotomy many of us are troubled about not saying one is a Bailout one is. Is not a bail out or anything like that. Well the Federal Reserve was acting in its sphere of influence to address financial issues as I said I think housing is very important and we"...

[0:00]" Chairman Schumer vice chairman Maloney representative Brady and other members of the committee I'm pleased to appear before the joint economic committee. In response to deterioration in the near term outlook for the economy and intensified strains in financial markets. In recent months the Federal Reserve has eased monetary policy substantially further. And taken strong actions to increase market liquidity. My remarks today able first offer my views on conditions in financial markets and the outlook for the US economy. And then discuss recent actions taken by the Federal Reserve. Although our recent actions appear to have helped stabilize the situation somewhat financial markets remain under considerable stress. Pressures and short term bank finding markets which had abated somewhat getting late last year have increased once again. Many lenders have been reluctant to provide credit to -- parties especially -- investors. And it increased the amount of collateral they require to back short term security financing agreements. To meet those demands investors have reduced their leverage and liquidated holdings of securities putting further downward pressure on securities prices. Credit availability also has been restricted because some large financial institutions including some commercial and investment banks and government sponsored enterprises. -- reported substantial losses and write downs reducing their available capital. Several of several of these firms have been able to raise fresh capital to offset at least some of these losses and others are in the process of doing so. However financial institutions balance sheets have also expanded. As banks and other institutions have taken on their balance sheets various assets that can no longer be financed on a standalone basis. Thus the capacity and willingness of some large institutions to extend new credit remains limited. The effects of the financial strains on credit cost and availability have become increasingly evident. With some portions of the system that it previously escaped the worst of the turmoil such as the markets for municipal bonds and student loans having been affected. Another market that is previously been largely exempt from disruptions was set for mortgage backed securities issued by government agencies. However beginning in mid February worsening liquidity conditions and reports of losses at the TSE's Fannie Mae and Freddie Mac. Caused the spread -- agency MVS heels over the yields on comparable treasury securities to rise sharply. Together with the increased fees imposed by the GICs the rise in the spread resulted in higher interest rates are conforming mortgages. More recently agency NBS spreads and conforming mortgage rates have retraced part of this increase. It conforming mortgages continue to be readily available to households. However for the most part to non conforming segment of the mortgage market continues to function poorly. In corporate debt market yields and spreads and both investment grade inspected the great corporate bonds rose through mid march before falling more recently. Issuance of investment grade bonds -- both financial and non financial corporations has been quite robust so far this year. But issuance of new high yield debt has stalled. Strains continue to be evident in the commercial paper market as well where risk spreads remain elevated and the quantity commercial paper. Particularly asset backed paper outstanding has decreased. Commercial and industrial loans at banks grew in January and February at a considerably slower pace in previous months. These developments in financial markets which themselves reflect in part. Greater concerns about housing and economic outlook Georgia have weighed on real economic activity. Notably in the housing market sales of both new and existing homes and generally continued weak. Partly as a result of reduced availability of mortgage credit and home prices have continued to fall. Starts of new single family homes declined an additional 7% in February bringing -- have declined since the early 2000 peak. 2006 peak of single family starts to more than 60%. Residential construction is likely -- contract so much further in coming quarters. As builders try to reduce their high inventories of unsold new homes. Private payroll employment fell and 1000 in February after two months of smaller job losses. With job cuts in construction and closely related industries accounting for a significant share of the decline. But demand for labor has also moderated recently in other industries such as business services and retail trade. And manufacturing employment has continued on his downward trend. Meanwhile claims for unemployment insurance have risen somewhat on balance. And surveys indicate that employers have scaled back hiring plans and that job seekers are fighting. Greater difficulty in finding work. In employment rate edged out in February and remains at a relatively low level. However in light of the sluggishness of economic activity and other indicators of softer labor market I expected to move somewhat higher in coming months. After rising at an annual rate of about 3% over the first three quarters of last year. Real disposable income has since increased -- only about a 1% annual rate. Reflecting weaker employment conditions and higher prices for energy and food. Concerns about employment and income prospects together with declining home values and tighter credit conditions. Have caused consumer spending to decelerate considerably from the solid pace seen during the first three quarters of last year. I expected tax rebates associated with the fiscal stimulus package recently passed by the congress. Provide some support consumer spending in coming quarters. In the business sector the pullback in hiring that I noted earlier has been accompanied by some reduction capital spending plans. As weaker sales prospects tighter credit and heightened uncertainty have -- business leaders more cautious. On a more positive note the non financial business sector remains financially sound. With liquid balance sheets and the leverage ratios and most firms have been able to avoid unwanted buildups in inventories. In addition many businesses are enjoying strong demand from abroad. Although the prospects for foreign economic growth and diminished somewhat in recent months. Net exports should continue to provide considerable support to US economic activity in coming quarters. Overall the near term economic outlook has weakened relative to projections released by the federal open market committee at the end of January. It now appears likely -- real gross domestic product will not grow much if at all over the first half of 2008 and could even contract slightly. We expect economic activity to strengthen in the second half of the year in part as the result of stimulative monetary and fiscal policies. And growth is expected to proceed at or little above -- sustainable pace in 2009. Bolstered by stabilization of housing activity beat at low levels and gradually improving financial conditions. However in light of the recent turbulence in financial markets the uncertainty attending this forecast is quite high and the risks remain to the downside. Inflation has also been a source of concern. The price index or personal consumption expenditures rose three point 4%. Over the twelve months ending February up from two point 3% over the preceding twelve month period. To a large extent this pick up inflation has been the result of sharp increases in the prices of crude oil agricultural products. And other globally traded commodities. Additionally the decline in the foreign exchange value the dollar has boosted some non commodity import prices and thus contributed to inflation. However the so called core rate of inflation that is inflation excluding food and energy prices. Has edged down recently after -- somewhat late last year. We expect inflation to moderate in coming quarters. That expectation is based in part and futures markets indications of a leveling out of prices for oil and other commodities. And is consistent with our projection that global growth and -- demand for commodities will slow somewhat during this period. And as I noted we've projected easing of pressures on resource utilization. However some indicators of inflation expectations have risen an overall uncertainty about the inflation outlook has increased. Will be necessary to continue to monitor inflation developments carefully in the months ahead. I turned out the federal reserve's policy responses to these financial and economic developments. Well functioning financial markets are essential for the efficacy of monetary policy and indeed for economic growth and stability. To improve market liquidity and market functioning and consistent with its role as the nation's central bank. The Federal Reserve has supplemented its long standing discount window by establishing three new facilities for lending. To depository institutions and primary dealers. The lending facilities now in place offer depository institutions and primary dealers to complementary alternatives for meeting funding needs. One -- facilities to discount window for depository institutions and the primary dealer credit facility for primary dealers offers daily access to variable amounts of funding. At the initiative of the borrowing institution. A second care facilities the term auction facility for depository institutions and term securities lending facility for primary dealers. Makes available predetermined aggregate amounts of longer term funding and preannounce states. With the interest rate in the distribution of the awards across institutions being determined by competitive auction. Although these facilities operate through depository institutions and primary dealers they are designed to support -- broad financial markets and the economy. -- facilitate the provision of liquidity by those institutions to their customers and counterparts. The primary dealer credit facility was put in place in the wake of the near failure Bear Stearns a large investment bank. On March 13 Bear Stearns advised the Federal Reserve and other government agencies -- the Securities and Exchange Commission. It is acquitted position has significantly deteriorated and it would have to file for chapter eleven bankruptcy the next day. On this alternative sources of funds became available. This news raised difficult questions of public policy. Normally the market source out which company survive and which fail and that is as it should be. However the issues raised here extend well beyond the fate of one company. Our financial systems extremely complex and interconnected and Bear Stearns participated extensively in a range of critical markets. With financial conditions fragile the sudden failure Bear Stearns likely would have led to a chaotic unwinding of positions in those markets. And could have severely shaking confidence. The company's failure but also cast doubt on the financial positions of some of Bear Stearns thousands counter parties and perhaps of companies with similar businesses. Given the current exceptional pressures on the global economy financial system. The damage caused by default by Bear Stearns there have been some severe extremely difficult to contain. Moreover the adverse effects -- can -- financial system. It would have been felt broadly in the real economy through its effects on asset values and credit availability. Prevent a disorderly failure Bear Stearns and the unpredictable but likely severe consequences of such a Mark of such a failure for market functioning. And the broader economy. The Federal Reserve in close consultation with the Treasury Department agreed to provide funding to Bear Stearns who JPMorgan chase. Over the following weekend JPMorgan chase agreed to purchase Bear Stearns and assumed various financial obligations. The Federal Reserve has taken additional measures to improve market liquidity. We have initiated a series of 28 chasing a -- term repurchase transactions the primary dealers. Expected accumulate 200 billion dollars outstanding. Which dealers may offer any of the types of collateral that are eligible for conventional open market operations. We've also expanded and extended reciprocal currency arrangements -- swap lines with the European central bank and the Swiss national bank. Using these spotlighted the participating central banks are providing dollar liquidity to financial institutions in their jurisdictions. Which should improve the functioning of the global market for dollar funding. These facilities and programs we kept in place as long as conditions warrant their ongoing news. We are working closely with the Securities and Exchange Commission. To monitor the financial conditions and funny positions of primary dealers who might seek Federal Reserve credit. Today the recent acquitted measures implemented by the Federal Reserve seemed to have been helpful in addressing some of the strains in financial markets. Funding pressures on primary dealers appear to be eased somewhat. And liquidity seems to be improved in several markets including as noted earlier the market for agency mortgage backed securities. To the extent to these measures improve market functioning -- will have favorable effects and the ability and willingness to make credit available to the broader economy. More liquid markets also increased the efficacy of monetary policy. Which in turn improves -- ability to meet the goals set forth by the congress namely to promote maximum employment and price stability. As you know in response to the further weakening of economic conditions the Federal Reserve has continued to ease the stance of monetary policy. The FOMC reduced its target for the federal funds rate by a total of 125 basis points in January invite additional 75 basis points at its march meeting. Leading the current targeted to a 14% three percentage points below its level last summer. As the committee noted in his most recent post meeting statement. We anticipate that these actions together with the steps we've taken a Foster market liquidity. We'll help to promote growth over time and to mitigate the risks to economic activity. Clearly the US economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and respond to traverse challenges. Much necessary economic and financial adjustment has already taken place. And monetary and fiscal policies aren't trained to support a return to growth in the second half of this year and next year. Remain confident in our economy's long term prospects thank you be."

[15:38]" Thank you Christian. Next I just want to go to some of the Bear Stearns as I mentioned -- before and after questions and going to. -- what goes in the and you can speak at some time first question everyone wants to know I think is at what time did the Fed acts the members of the Fed and you become concerned about the long term viability there. What happened after the two hedge funds became in trouble did you have any idea that there might go bankrupt before they notified the Fed. And could earlier more aggressive action one of the government regulators private action most probably saved there. And in the future we -- there are two issues one in order to avoid -- future situation what actions has the Fed taken subsequently to deal with the possible. Similar situation that is a freeze up of liquidity. I know you've gone to the window you don't have to elaborate that are there any other actions taken particularly in regard to individual firms don't want you to mention which ones just in general. And do you expect these Bear -- situation to in light of Bear Stearns do you expect the Fed the FCC to be more pro active in protecting investors from future -- like situation. And then finally you can get an answer these at some length how is this different from house. In other words housing one of the things that bothers many of us is. Not the necess