Impact of Credit Crisis Appears Limited

[Sep 29, 2007.]

 

While the nation's credit crisis has had a devastating effect on the housing sector, its effects on other segments of the economy appear to be limited, according to the Federal Reserve.

A Federal Reserve report stated, "Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited."

Observers believe that a September 18th meeting of the Federal Reserve will bring with it a lower key interest rate—a rate which now stands at 5.25%. The rate has remained unchanged for the last four years, but a ¼ percentage point change could help to shield the economy from the effects of the credit crunch.

The credit crisis had its start in the subprime mortgage sector. Subprime loans are those that are extended to individuals with troubled credit histories. But now, the crisis has spread to those with other housing loans, raising fears of recession. In response, the Federal Reserve has cut the interest rate charged to financial institutions for loans. It has also channeled billions of dollars into the country's financial system.

In a recent speech, the chairman of the Federal Reserve, Ben Bernanke, stated that the central bank would "act as needed" to protect the economy from the credit crisis. However, Bernanke stopped short of offering a bailout to lenders and investors.

Because of the troubles in financial markets, banks have been tightening lending standards for would-be homebuyers. As a result, the Fed says, there has been "a noticeable effect on housing activity. The reduction in credit availability added to uncertainty about when the housing market might turn around."

Meanwhile, retail sales appear to be holding their own, while automobile and furniture sales are sluggish. Manufacturing appears to be on the ascent, while the demand for building materials and cars is apparently slipping.

The Fed based its report on information collected from its 12 regional banks prior to the end of August.

Julie Ann Amos
September 29th 2007

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