Financial Outlook Improving But Far From Stable
Chairman Ben Bernanke gave testimony before the House of Representatives on the current economic outlook and the status of the federal budget. Fiscal and monetary policy face a stiff challenge in the next year in trying to end a recession that has already seen the economy contract by about 6% and the federal budget balloon to mammoth proportions.
Conditions in a number of financial markets have improved since earlier this year, likely reflecting both policy actions taken by the Federal Reserve and other agencies as well as the somewhat better economic outlook. Nevertheless, financial markets and financial institutions remain under stress, and low asset prices and tight credit conditions continue to restrain economic activity.
The government has pretty much fired it’s bolt, any more additional spending could have adverse affects on long term pressure on interest rates, which started rising in recent weeks. It’s still to early to tell if rising mortgage rates will send the housing market, which has shows signs of bottoming out in recent months, into another tailspin.
The biggest obstacle to additional spending will be the growth of the federal debt to GDP ratio that is already expected to reach post-World War II levels in the next two years. Over half the banks, 10 out of the 19 largest banks surveyed by the Treasury will require more capital and will need a plan to raise it by the November 9th deadline.
With the housing market still in flux, potential losses to banks still remains a grave threat to the stability of the financial system. The Fed still expects the economic retraction to bottom out by the end of the year but even the most favorable projections predict a long road to recovery.
