Fed May Temper Its Optimism After Mortgage Meltdown (Update1) By Steve Matthews http://www.bloomberg.com/apps/news?pid=20601087&sid=aDVaE01Erue8&refer=home March 21 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke may be finding his optimism on consumer spending dented after the rout in subprime mortgages and decline in stocks. Fed policy makers, who set interest rates today, may tweak their statement to reflect risks to the ``moderate'' economic expansion flagged at the prior meeting. In the past four weeks, more than $700 billion has been wiped from U.S. stock-market value and reports showed late payments on subprime mortgages jumped to a four-year high. The Federal Open Market Committee will probably retain language signaling it's closer to raising rates than cutting them, Fed watchers said. Any significant watering down would be read by some traders as a step toward lower rates and a blow to Bernanke, who last month insisted the consumer was the ``mainstay'' of growth. ``There will likely be some downward revision to the staff's projection for near-term growth,'' said Brian Sack, a former Fed economist and now vice president at Macroeconomic Advisers LLC in Washington. ``The committee's assessment of the balance of risks has probably tilted to some degree.'' Policy makers started the second day of their meeting today and are scheduled to announce their decision at about 2:15 p.m. in Washington. Officials will hold the benchmark rate at 5.25 percent for a sixth meeting, according to all 93 economists surveyed by Bloomberg. Traders are betting on a cut by the end of August, futures show. Ballast of Growth At the past six meetings, policy makers described rising wealth as the underpinning for consumer spending, according to minutes of the sessions. Households' net wealth climbed 7.4 percent last year to $55.6 trillion, Fed data showed March 8. More than half the increase came from real estate and mutual-fund holdings. The gains may be eroding this quarter after the Standard & Poor's 500 Index retreated more than 3 percent in the past four weeks, in part because of the rising concerns about subprime mortgages. More borrowers with little or poor credit history are falling behind on payments after two years of Fed rate increases made their adjustable-rate loans more costly. ``The drop in housing and stock values will cause some consumers to spend more cautiously,'' said William Ford, a former Atlanta Fed president. ``There will probably be some changes in the wording of the Fed's announcement indicating they've noticed what's happening to slow the economy's growth.'' The share of subprime borrowers making late payments jumped to 13.33 percent last quarter and foreclosures rose, according to the Mortgage Bankers Association. Delinquency rates on prime mortgages rose to 2.57 percent, the most since June 2003. FOMC Language The FOMC said in its January statement that ``recent indicators have suggested somewhat firmer economic growth'' and that a ``moderate'' expansion was likely. Bernanke, 53, told Congress last month that ``consumer spending continues to be the mainstay of the current economic expansion.'' Since then, the Commerce Department reduced its estimate of fourth-quarter economic growth by more than 1 percentage point, to 2.2 percent. The Macroeconomic Advisers ``tracking'' estimate of GDP growth this quarter fell to 1.7 percent yesterday from 2.5 percent at the end of January. Declines in wealth are important to the outlook because 40 percent of Americans with at least $150,000 in annual income would cut their spending in response to a decline in net worth, according to a survey by Luxury Institute LLC, a New York-based research firm. ``We haven't reached the threshold yet where people are cutting back,'' said Milton Pedraza, chief executive officer of Luxury Institute in New York. ``I think there will be a tempered pullback.'' Job Market Warnings of a consumer-led slowdown have proved wrong in the past and a strong job market buttresses the Fed's forecast of 2.5 percent to 3 percent GDP growth this year. Unemployment fell to 4.5 percent in February, approaching a five-year low. The Commerce Department also said yesterday that construction began on more new homes last month, easing concern about a slowdown. Bernanke said on March 2 at Stanford University in California that ``we have not yet seen any spillover'' from subprime mortgage problems. ``If the Fed thinks it's contained, that means they're not as worried about growth,'' said Drew Matus, a senior economist at Lehman Brothers Holdings Inc. in New York. ``They're more worried about inflation,'' which in January held above Bernanke's preferred range for a 10th month. Watching House Prices Economists say much of the spending fallout depends on what happens to home prices this year. Sales prices on previously owned homes haven't risen since July, according to the National Association of Realtors, and dropped 3.1 percent in the 12 months to January. Pacific Investment Management Co. last week forecast U.S. median home prices will fall by 4 to 5 percent this year. Merrill Lynch & Co. economist David Rosenberg predicted as much as a 10 percent drop. ``Maybe this is another leg down for the housing market,'' said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. ``Some of that may creep into consumer spending. I'm not trumpeting any alarms, but I think the risks are multiplying.''