Although Federal Reserve Chairman Ben Bernanke and his central bank colleagues acknowledged challenges that have intensified since their last meeting in late June, they nonetheless expressed hope that the economy will safely make its way.The problem for the Federal Reserve is how to respond to the growing housing and stock market turbulence without sounding like the sky is falling. They felt the best way to accomplish this was to acknowledge the problem exists but downplay the severity.
The policymakers also clung to their belief that the biggest potential danger to the economy is that inflation won't recede as they anticipate.
Against these economic crosscurrents, the Fed left an important interest rate at 5.25 percent on Tuesday. In turn, commercial banks' prime interest rate for certain credit cards, home equity lines of credit and other loans _ would stay at 8.25 percent.
The credit markets are very tight right now and that should slow mergers and acquisitions which are a main reason for the stock markets rise. You can also look to foreign markets which are also down. Investments in such countries as Brazil, India and Russia are seen as much more risky and with the flight to more stable investments you may see these markets decline or grow much more slowly.
Believing that the housing market problems will not reach into the broader economy is naive and you will see greater stock market volatility for some time to come. The housing market will not recover until 2009 and the pain and suffering for the middle class will continue during that time. The housing market correction will leave many middle class people feeling much less wealthy which will cause them to slow spending.
I have said the US economy will slip into recession or will grow at a rate just above recession for the next year. I stick by that prediction.
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