Despite general improvement in the financial industry, credit remains tight, especially for “bank-dependent” households and small businesses, Fed Chairman Ben Bernanke said today in remarks followed closely by Wall Street.
Bernanke’s economic outlook was viewed positively by the stock market for lacking any indication of interest rate hikes in the near term. But the Fed chief referred to “formidable headwinds” that is keeping the pace of recovery from moving faster.
“Despite the general improvement in financial conditions, credit remains tight for many borrowers, particularly bank-dependent borrowers such as households and small businesses,” Bernanke said. “And the job market, though no longer contracting at the pace we saw in 2008 and earlier this year, remains weak. Household spending is unlikely to grow rapidly when people remain worried about job security and have limited access to credit.”
Bernanke said the Fed has been working to re-start the market for asset-backed securities that finance auto loans, credit card loans, small business loans, student loans, loans to finance commercial real estate, and other types of credit.
“By working to revive these markets, which allow banks to tap the broader securities markets to finance their lending, we have helped banks make room on their balance sheets for new credit to households and businesses,” the Fed chairman said. “In addition, we have supported the overall functioning of private credit markets and helped to lower interest rates on bonds, mortgages, and other loans by purchasing unprecedented volumes of mortgage-related securities and Treasury debt.”
He also said bank regulators have continued to urge banks increase lending to credit-worthy customers, while providing guidelines to banks for working “constructively with troubled commercial real estate loans.” Commercial real estate loans are widely considered to be the sector facing the biggest challenges within the regional bank sector.
In his remarks to the Economic Club of Washington, Bernanke started out with the better news: economic recovery has intensified.
“The financial system and the economy have moved back from the brink of collapse, economic growth has returned, and the signs of recovery have become more widespread,” he said.
Bernanke pointed to a number of factors for a continuing economic recovery next year. He said corporations are having “relatively little difficulty raising funds in the bond and stock markets,” while stock prices and other asset values have more than recovered from their lows.
Moreover, there are indicators suggest that fears of systemic collapse have receded substantially.
“Monetary and fiscal policies are supportive. And I have already mentioned what appear to be improving conditions in housing, consumer expenditure, business investment, and global economic activity,” Bernanke said.
Click here for the Fed’s full overview of Bernanke’s comments.
