Opening Statement: U.S. Senate Committee on Banking, Housing, and Urban Affairs "The Second Monetary Policy Report to the Congress for 2007"

Statement

Opening Statement: U.S. Senate Committee on Banking, Housing, and Urban Affairs "The Second Monetary Policy Report to the Congress for 2007"

Thank you, Mr. Chairman. And thank you, Chairman Bernanke, for joining us today to discuss the state of monetary policy and its reflection on our economy. At the past eight meetings of the FOMC, the Fed has the federal fund rates steady at five-and-a-quarter percent. However, significant turmoil in the housing market, particularly related to subprime mortgages, our growing trade deficit and out negative household savings rate continue to pose tremendous challenges to setting monetary policy. And I know, Mr. Chairman, you've personally expressed concern about core inflation being higher than is desirable in the long run. But the risk of raising interest rates too high is that a weakening housing sector and rising oil prices may be taking their toll on consumers and businesses alike and slowing down the economy too much already. I look forward to your insights about the kind of policies that are likely to be effective in addressing the challenges we face in this economy and offering real opportunities for growth that provide widespread benefits to the American people.

On a systemic level, the weakening housing sector and turmoil in the subprime mortgage market have placed pressure on both investors and borrowers. Bear Stearns has recently acknowledged that two of its hedge funds are now worth nearly nothing after some of its investments in subprime mortgages went bad. Last week, both Moody's and Standard Imports significantly-- (audio difficulty) -- downgraded rating on hundreds of subprime-related bonds. The ABX index, which tracks and performs the various classes of subprime-related bonds, hit new lows yesterday. In the past few months, portions of the index that tracked especially risky mortgage bonds with junk-grade ratings have been falling. And this is now spreading into the portions of the index that have tracked bonds with ratings of AAA or AA. According to Merrill Lynch's latest fund managers survey, which polled 186 fund managers controlling $618 billion in assets, 72 percent of managers said that credit or default risk was the biggest threat to financial market stability. I would appreciate hearing your thoughts on some of these events, particularly as they may pertain to the financial accelerator effect you spoke of in Georgia last month and the efforts of the Federal Reserve to monitor some of these risks.

Finally, the Federal Reserve has the authority and the responsibility to provide -- excuse me, to prohibit unfair, deceptive lending practices. As such, Mr. Chairman, I was pleased to hear that the Fed will likely propose additional rules under the Home Ownership and Equity Protection Act -- HOEPA -- to provide consumers with better protection through bans on some mortgage practices. Additionally, I understand that the Fed will join other regulators in a pilot project to monitor the practices of non-depository subprime mortgage firms. I am interested in your perspective on what additional actions the Federal Reserve will be taking to meet the regulatory portion of its mandate, and I look forward to your testimony, Mr. Chairman.

Thank you.

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