Financial Conditions and the Economic Outlook

We gather during economically trying times, both in the United States and increasingly around the globe. In my remarks this morning, I would like to discuss the factors I see affecting the outlook for the U.S. economy and monetary policy. As always, I speak only for myself, and not for my Federal Reserve System colleagues.1 Financial market conditions loom large in any discussion of the economy these days. The heart of the problem, of course, is the home mortgages made from late 2005 through early 2007, near the end of long U.S. housing boom that began in 1995. Since the peak in activity in 2005, housing investment has fallen by more than 40 percent. Average housing prices, as measured by the FHFA repeat sales index, have fallen 6.5 percent since their peak in April 2007. Some markets have experienced more dramatic declines; the home price index for California fell 18 percent, for example. The resulting erosion in home equity for many borrowers has meant that mortgages made near the peak of the boom, especially the subprime and non-traditional categories, are experiencing much larger losses than expected.