Fed's Bernanke predicts further mortgage turmoil

Business Law

More delinquencies and foreclosures can be expected in the subprime, adjustable-rate mortgage market as borrowers face interest-rate resets, Federal Reserve Chairman Ben Bernanke said Thursday.

In testimony to the House Financial Services Committee, Bernanke also said the market for those mortgages has "adjusted sharply," and that markets "do tend to self-correct."

He outlined steps the Fed is taking to help reduce the risk of foreclosure and stressed the need to beef up underwriting practices.

Just two days after the Fed lowered the federal funds rate by 50 basis points, Bernanke also said the central bank stands ready to foster price stability and sustainable economic growth.

"Recent developments in financial markets have increased the uncertainty surrounding the economic outlook," Bernanke said. "The [Federal Open Market] Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth," he said.

Bernanke said the recent surprise half-percentage point rate cut was designed to forestall potential effects of tighter credit conditions on the broader economy.

"We took that action to try to get out ahead of the situation," Bernanke said.

Bernanke said the central bank's economists would constantly review their internal forecast.

"There is quite a bit of uncertainty, so we're going to have to continue to monitor how the financial markets evolve and how their effects on the economy evolve and try to keep reassessing our outlook and adjusting policy to meet" the Fed's twin goals of price stability and low unemployment.

Still, he said, the global financial system is "in a relatively strong position" to work through the recent credit and market turbulence.

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