Federal reserve warns on sub-prime impact

The US sub-prime lending market has yet to affect the US economy at large, according to the Federal Reserve this week.

Despite the lack of impact thus far, the Federal Reserve have predicted that there may be effects felt for a considerable time after the situation is cleared up.

The US sub-prime market, which loans to poor credit families, has been warped in scandal over lax practices and rising default rates over recent months, which has been exposed to international media under serious investigation.

The effect has been felt around the world on major stock markets, with investors struggling to find much confidence in corporate securities in the current economic climate.

Despite that, the Federal Reserve believe that we have yet to feel the effect of the US housing market crisis, suggesting there may be further economic hardship in the coming weeks and months.

Experts have estimated the cost of repairing the crisis in the lending market could cost around $100 billion, with many major banks responsible for allowing unauthorised mortgage amounts.

In his report, Chairman Ben Bernanke forecast that the crisis has been restricted only to the sub-prime market, and hasn’t yet reflected any change in the direction of the economy at large.

Amongst other things, Bernanke forecast moderate growth for the remainder of 2007, with a turnaround into early 2008 for the US economy.

Whilst the situation has undoubtedly hindered growth and market trading, Bernanke still believes that the impact of the market is yet to be felt by the wider economy.

The US Central Bank is predicted to maintain central borrowing rates at 5.25%, to be announced later in the week.

Analysts have forecast that interest rates will be adjusted to reflect the full impact of the sub-prime crisis once it is fully uncovered and dealt with.

Discuss this in the Finance Markets forums

Story link: Federal reserve warns on sub-prime impact