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Bernanke: Fiscal policy becomes biggest headwind to growth

The economy is benefiting from a modest housing recovery even though federal fiscal policy remains a significant headwind to growth, Federal Reserve Chairman Ben Bernanke told reporters Wednesday.

Bernanke spoke to the press after the release of the Federal Open Market Committee minutes.

If the recovery continues, the Fed plans to taper off mortgage-backed securities purchases once the unemployment rate hits 7%, the Fed Chair suggested.  And while reporters grilled Bernanke about inflationary risks and the impact of MBS purchases, he remained cautiously optimistic.

The Fed Chair's more optimistic tone stemmed from improving market fundamentals, with Bernake highlighting increases in household wealth and fewer large scale layoffs. State and local governments also are improving somewhat financially, he said.

The only major drag is federal fiscal policy.

The nation's housing recovery also continues to benefit the economy, Bernanke added, with low interest rates sparking home sales and rising prices providing an equity cushion for once underwater borrowers.

With the government now the only major player in the secondary mortgage market, reporters asked Bernanke about the impact of a government pullback. Specifically, they wanted to know the fate of the 30-year, fixed-rate mortgage without government support.

"It is entirely possible that there will be a major change in the government's role in the mortgage market, and if so, there will be a different structure for mortgages," the Fed Chair said.

"It is possible that we find a different structure is better for some people," he added.

bswanson@housingwire.com

 

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