WASHINGTON — Financial markets will be on edge Friday when Federal Reserve Chairman Ben Bernanke talks about housing in his first speech since credit markets seized up earlier this month and stock and bond prices began to teeter.
The central bank chief is scheduled to give the keynote speech at the Fed's annual symposium at Jackson Hole, Wyo. The gathering, organized by the Kansas City Fed, is normally a low-key, academic affair addressing such issues as demographic change, income inequality and economic forecasting.
This year is different. The meeting, which pulls economists and central bankers from around the globe, comes amid falling consumer and business confidence and growing expectations that the Fed will be forced to cut interest rates to stave off a possible recession.
Then there's the topic. "Housing, Housing Finance and Monetary Policy" is frighteningly timely, given historic declines in home prices, the highest inventory of unsold houses in 16 years and the implosion of the subprime mortgage market.
Subprime mortgages are higher-priced loans to borrowers with impaired credit. Spiking defaults among subprime borrowers have forced dozens of lenders out of business and hurt investors and hedge funds that bought bonds backed by the loans. The subprime problems have shaken confidence in a host of other credit products and further added to the sharp slowdown in the housing market.
"There will definitely be 100 percent attention. Thankfully, the topic of his speech is pretty much a bull's-eye as to what the market is thinking about," says Mike Englund of Action Economics.
Englund doesn't expect Bernanke to tip his hand regarding future Fed interest rate policy, but warns, "it's going to be impossible for the market not to read the tea leaves in this speech and not get something from it."
Financial news organizations are sending extra reporters to roam the wood-and-stone Jackson Lake Lodge, with its soaring views of the Tetons. In more normal times, the sighting of an occasional moose is considered a major event at the remote lodge.
The markets expect the central bank to cut the federal funds rate — what banks charge each other for overnight loans — at its Sept. 18 meeting, according to special contracts that track expected Fed rate moves.
The Fed has held the funds rate, which banks use in pricing a variety of business and consumer loans, steady at 5.25 percent for more than a year in an effort to tame inflation. In the past month, however, the central bank has pumped large amounts of cash into the system and cut the rate it charges at the so-called discount window where it lends directly to banks.