- The Washington Times - Thursday, January 28, 2010

The Federal Reserve acknowledged concerns on Capitol Hill about consumers who are out of jobs and short on credit, saying Wednesday that it may continue programs to support mortgages, small businesses and consumers loans this year if financial conditions don’t improve.

The Fed’s nod to senators, who say they have demanded that it pay more attention to middle-class problems in closed-door meetings with Chairman Ben S. Bernanke in recent days, came as prospects for Mr. Bernanke’s confirmation to a second term continued to improve, with a vote on shutting off debate in the Senate scheduled for Thursday.

Meanwhile, Treasury Secretary Timothy F. Geithner gave a feisty defense to accusations that he favored Wall Street over Main Street in a hearing of the House Oversight and Government Reform Committee, saying he, Mr. Bernanke and other federal officials with Wall Street ties “were motivated solely by what we believed to be in the public interest.”

Despite considerable anger from lawmakers of both parties at his handling of the $180 billion bailout of American International Group when he was president of the Fed’s New York reserve bank, none of the committee Democrats and only one Republican called for his resignation.

Mr. Bernanke also appeared safe in his job by midweek after weathering an intense populist storm over the weekend, with various senator surveys showing around 50 Senate members are prepared for vote for his reconfirmation. Some Democrats who oppose the Fed chairman have told Democratic leaders that they will support breaking a filibuster on the nomination in Thursday’s showdown vote, which will require 60 votes to pass.

Apparently to help secure support from Congress while acknowledging the still-uncertain prospects for the economy and middle-class consumers, the Fed’s rate-setting committee added language to a statement released Wednesday saying that, while the Fed is still expecting to end its programs supporting mortgages and other consumer loans on schedule this year, it is prepared to keep them in place if financial conditions do not improve as expected.

The Fed’s massive program for purchasing $1.25 trillion in mortgage securities issued by Fannie Mae and Freddie Mac — which funded most of the U.S. mortgage market in the past year — is scheduled to expire at the end of March.

But many housing analysts and legislators have warned that the revival seen in the housing market last year is too weak to continue without the Fed’s support. Some say the Fed’s withdrawal from the market could force up 30-year mortgage rates by a full percentage point or more.

“The housing and mortgage markets depend very heavily on the Federal Reserve,” said Sung Won Sohn, economics professor at California State University, Channel Islands. “Without the support of the central bank, the housing market could deteriorate significantly, jeopardizing the expected economic recovery. It is estimated that 80 percent or more of all the mortgage-related securities are being bought by the central bank.”

Economic reports in recent days showed big drops in sales of new and existing homes at the end of last year, in what economists say was a reaction to the temporary expiration of a homebuyer tax credit, which Congress later renewed through April of this year. But the reports served to show how vulnerable the housing market is to setbacks once government support is removed.

Bowing to those concerns, the Fed committee, which is chaired by Mr. Bernanke, did not mention an improved outlook for housing, as it had after previous meetings last year.

Rather, it included for the first time a pledge to “modify” its plans for ending the mortgage and consumer-lending programs “if necessary to support financial stability and economic growth.”

In its statement, the Fed also repeated its pledge not to raise short-term interest rates, which are now near zero, “for an extended period.”

While the Fed move recognizes the political as well as economic realities of a prolonged recession, analysts said it also reflects uncertainty within the Fed itself that the economy will continue to improve after a burst of strong economic growth of close to 5 percent at the end of last year.

Minutes from the Fed’s last meeting showed that some members of the committee were worried that the housing market would flop once the Fed withdraws from the mortgage market.

Tyson Wright, a senior trader at Custom House, a Canadian foreign-exchange firm, said investors are closely watching what the Fed does with the mortgage program because ending it too soon could be a mistake, even though the Fed is anxious to turn off the spigot of easy money needed to keep the program alive.

“The Fed must be careful not to accidentally trigger a double-dip recession, given the fragile state of economic growth and the labor market,” he said. On the other hand, economists warn of a risk of inflation if the Fed doesn’t start to gradually withdraw from such programs because it essentially has been printing money to purchase the mortgage bonds.

A similar test looms in June, when the Fed’s programs to kick-start lending to small businesses and consumers for college and auto purchases are due to expire. The Fed has been trying to re-create a secondary market for such loans through the programs, which were instituted last year after the private securitization market collapsed.

Even with the Fed programs, lending to consumers and businesses has been shrinking in the past year, and the private securitization market has not come back to life. Some analysts, like members of Congress, worry that those lending markets may need further Fed support as well, to ensure a recovery.

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