by Calculated Risk on 2/16/2006 05:15:00 PM

The Financial Times reports: Bernanke upbeat about housing effect

... Ben Bernanke suggested that the discussion around the Federal Reserve’s boardroom table in coming months may focus on ... house prices.

The outlook ... Bernanke presented ... were based on the assumption that the US housing market is slowing after the sizzling growth ... in recent years.

Mr Bernanke’s remarks ... suggested that the Fed expects the housing market to cool but not to undergo a dramatic slowdown ...

"Low mortgage rates, together with expanding payrolls and incomes and the need to rebuild after the hurricanes, should continue to support the housing market. Thus, at this point, a levelling out or a modest softening of housing activity seems more likely than a sharp contraction," Mr Bernanke said.
...
Since rising household wealth and home equity withdrawal have supported consumer spending, there may be an impact on spending. But it is not expected to be dramatic. The Fed expects households to raise their savings rate from near zero, but only gradually. Residential investment is expected to slow, but business investment is expected to take up the slack.

... It is quite likely that policymakers may not know how much further they need to raise rates. Policy will be data-driven – and one of the key questions will be the course of, and the spillover effects from, the housing market.
...
But the housing market presents both upside as well as downside risks for growth and the federal funds rate. If low long-term rates mean the housing market continues to soar, then the FOMC may have to raise rates by more than what is currently expected, to prevent the economy from overheating.

"On the one hand, some observers believe that home values have moved above levels that can be supported by fundamentals and that ... a realignment - if abrupt – could materially sap household wealth and confidence and, in turn, depress consumer spending," the monetary report to Congress said.

"On the other hand, if home values continue to register outsized increases, the accompanying increment to household wealth would stimulate aggregate demand and raise resource utilisation further ... adding to inflation pressures."

At least Bernanke is being open about the problem, even if he is more optimistic than I am.