|
|
The
Housing Bubble and the Fed |
|||||||
Subject |
Housing and Interest Rates |
||||||
Topic |
Monetary Policy |
||||||
Key Words |
Interest Rates and Housing Bubble |
||||||
News Story |
Many forecasters are confounded by the continued growth in the Some analysts predict slower housing market growth is just ahead, and
higher interest rates could slow the economy down. “Looking ahead,
consumers do not anticipate an improvement in economic growth, nor in their
incomes,” reported Lynn Franco, director of the Conference
Board’s Nevertheless, Fed officials have given little credence to any data suggesting an economic slowdown. They remain focused on not allowing inflation to get a foothold in the economy and they intend to continue their self-prescribed gradual pace of increasing short-term rates. This “hot” market has caused housing prices to increase by as
much as 20 percent in parts of Fed chairman Alan Greenspan told House lawmakers in February that this phenomenon of continued low level long-term rates was a “conundrum” that he could not fully explain. If they continue, the housing bubble will likely expand. “Low interest rates, in turn, have been a major force driving the phenomenal run-up in residential real estate prices over the past few years,” said Fed governor Donald L. Kohn. He discounted worries about a crash in real estate prices, but did indicate that prices had climbed high enough to “raise questions” about increases in speculative buying and overvaluation. “We think there is a bubble, and we think the risks are higher that it will burst,” said Sheryl King, a senior economist at Merrill Lynch. “Even if you adjust for population growth, you’re seeing numbers that are bigger than any we have seen at this point in any previous economic cycle.” For now, this escalation in home buying is one more reason for the Federal Reserve to continue upward pressure on interest rates. The central bank is expected to raise short-term rates by another quarter point at their next meeting. If this increase occurs, it will bring the federal funds rate to 3 percent, which would be the eighth rate increase since last June. |
||||||
Questions |
|
||||||
Source |
Edmund Andrews, “Consumers Are Wary, but Housing Remains Hot”, The New York Times Online, April 27, 2005. |
Return to the Monetary Policy Index
©1998-2005 South-Western. All Rights
Reserved webmaster | DISCLAIMER