Fed President Janet Yellen, speaking at a gathering in Salt Lake City, put out the strongest warning against the housing bubble yet.
In addition to the uncertainties raised by higher energy prices, there are downside risks to economic growth relating to the housing market. This sector has been a key source of strength in the current expansion, and the concern is that, if house prices fell, the negative impact on household wealth could lead to a pullback in consumer spending. Certainly, analyses do indicate that house prices are abnormally high—that there is a “bubble” element, even accounting for factors that would support high house prices, such as low mortgage interest rates. So a reversal is certainly a possibility. Moreover, even the portion of house prices that is explained by low mortgage rates is at risk. There is a controversy about just why the rates have stayed so low. Over the past year, the Fed has raised the federal funds rate significantly. Normally, long-term interest rates also rise with increases in the expected path for the federal funds rate. But, long-term rates—such as those on 30-year fixed rate mortgages—have actually fallen over the period. This is what Chairman Greenspan has labelled a conundrum because there seems to be no convincing explanation for it. So, we can’t rule out the possibility that they would rise to a more normal relationship with short-term rates. This obviously might take some of the “oomph” out of the housing market. My bottom line is that while I’m certainly not predicting anything about future house price movements, I think it’s obvious that a substantial cooling off of the housing sector represents a downside risk to the outlook for growth.
(my emphasis)
I think these comments signify a real change in Fed behavior. These comments are much stronger than Greenspans ‘froth’ comments. While the Fed certainly can’t come forward and say there is a bubble, these comments seem to be as close as you can get.
Does good ol’ Al have one more ‘irrational exuberance’ speech left before retirement? Or did we already miss it?
Caveat Emptor,
Grim
Wow, Feds using the word, “Bubble”?
That’s a change.
I guess the Time has come for many to realize that it’s Over and the Fat Lady sang.
I did read the 4th part of the Report from the Bergen Record. Nothing earth shattering. Just repeat of what we already know.
These moron Fed Officials are totally to blame for this huge mess.