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Wednesday, January 17, 2007

Fed's Mishkin on Monetary Policy and House Prices

by Calculated Risk on 1/17/2007 01:12:00 PM

From Fed Governor Frederic Mishkin: The Role of House Prices in Formulating Monetary Policy

Once again the Fed is arguing against taking action when a possible bubble is forming. This is the same argument Greenspan made during the stock market bubble, but this time the issue is housing. However, the Fed stands ready to take action if the bursting of the bubble impacts the general economy.

Mishkin's conclusion:

Large run-ups in prices of assets such as houses present serious challenges to central bankers. I have argued that central banks should not give a special role to house prices in the conduct of monetary policy but should respond to them only to the extent that they have foreseeable effects on inflation and employment. Nevertheless, central banks can take measures to prepare for possible sharp reversals in the prices of homes or other assets to ensure that they will not do serious harm to the economy.