WASHINGTON — The Federal Reserve is keeping a close eye on economic conditions and will take further action as needed, San Francisco Federal Reserve Bank president Janet Yellen said yesterday.

The Fed is watching Wall Street for new signs of financial strain, and the central bank also is keeping an eye out for further housing market woes, Yellen said in remarks prepared for a community reinvestment conference in California.

“My colleagues and I have been deeply involved in assessing the impact of rising foreclosures on the financial markets and the U.S. economy, and in developing the Fed’s policy response,” Yellen said. “We continue to carefully monitor trends in the financial markets and the economy, and we are committed to acting in a timely manner to address new developments.”

So far, resetting adjustable-rate mortgages haven’t dealt a big blow to the economy, Yellen said, but the loans could pose a threat this year.

“While much attention has focused on interest rate resets as a trigger for delinquencies and defaults — particularly on loans with artificially low introductory rates — so far they have not played a significant role,” she said. “This is not to say, however, that resets wont matter. In 2008, about 1.5 million loans are scheduled to reset.”

Loan modification programs and other foreclosure prevention efforts appear to be having some effect, but more needs to be done, according to Yellen. She called for financial education for low-income borrowers, along with initiatives to help workers afford homes in high-cost areas.

“As long as an adjustable rate, interest-only or high LTV (loan-to-value) subprime loan is the only way to afford a house, low-income families will continue to take on loans that they cannot sustain over the long term, and may be at greater risk of falling prey to unscrupulous lending practices,” Yellen said.

— Market News International

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