*DJ Fed's Yellen: Monetary Policy 'Somewhat Accommodative'
*DJ Fed's Yellen: 'Makes Sense' To Continue Rate Increases
*DJ Fed's Yellen: GDP, Growth, Inflation In 'Good Shape'
*DJ Fed's Yellen: Inflation Pressures Likely To Moderate
*DJ Fed's Yellen: Not Sure Whether Housing Bubble Exists
*DJ Fed Yellen: Fed Could Manage Housing Price Drop Impact
DJ Fed Yellen: Fed Could Manage Housing Price Drop Impact
By Michael S. Derby
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--While not predicting any such outcome, a top Federal Reserve official Friday said a retreat in housing prices could be managed by the central bank and would be unlikely to hurt the economy as badly as the implosion of the late 1990s stock market bubble did.
In a speech that was largely optimistic about the outlook and indicated further rate hikes are likely, Federal Reserve Bank of San Francisco President Janet Yellen said "if a sizable reversal in house prices were to occur, it probably would affect the economy mainly through the lagged effects of declines in wealth and increases in interest rates, rather than through widespread financial disruptions."
Yellen, who isn't currently a voting member of the interest rate-setting Federal Open Market Committee, was speaking before the Portland, Ore., Community Leaders' Luncheon. Her comments came from a speech prepared for delivery before the group.
Yellen said it wasn't entirely clear whether the robust gains seen in housing prices represent a bubble at the national level, given the "uncertainty" about what's been pushing prices higher. Instead, she said "my focus as a monetary policymaker is on trying to understand what kind of risks a drop in house prices would pose for the economy."
She noted that in a hypothetical 25% drop in house prices, some $4.5 trillion of housing wealth would be wiped out. "This amounts to a decrease in consumer spending of about 1 1/4%" of gross domestic product, and "if house prices were to drop by 25%, the impact on the economy might be about half what it was when the stock market turned down a few years ago," Yellen explained.
And should this happen, the impact wouldn't be at once. "There probably would be time for monetary policy to respond by lowering short-term interest rates," thus making the hypothetical situation "manageable."
Yellen added, "while there undoubtedly would be some fallout from a substantial drop in house prices, the financial system and consumers appear to be in reasonably good shape to handle the situation."
DJ Fed Yellen: Fed Could Manage Housing Price Drop Impact-2-
Yellen's outlook on the economy was mostly positive. "Looking at the big picture elements - growth, employment, and inflation - I'd say things are in reasonably good shape," Yellen said. And "at 5%, the national unemployment rate now stands near conventional estimates of the natural rate consistent with "full employment."
Yellen's formal remarks didn't address the pace of potential Fed rate hikes, but nevertheless indicated that more tightenings seem likely. "Policy still appears to be somewhat accommodative, and given the recent inflation performance and the dwindling of slack, it makes sense to continue the process of removing that accommodation," she said.
"It seems to me that the economy is on track to achieve price stability and 'maximum employment'" which are the legal goals the Fed is instructed to achieve, Yellen said.
Inflation To Moderate
Yellen, who spoke on a day where the government released a report that showed more inflation in the economy than had once been thought, said there had been some slightly conflicting signals about price pressures during recent months. Even so, she said, "I expect to see some moderation in inflation going forward."
The bank president acknowledged energy price increases pose a risk to inflation and that increased costs there are being passed through to the broader economy. What's key is that they don't rise further, Yellen said. She added that some inflation pressures have also been related to one-time factors that shouldn't be repeated.
Yellen said the dollar should also help keep price pressures contained. "Even with the recent revaluation of the Chinese (yuan), the dollar has increased by 7 1/2% against major currencies so far this year, which should take some of the pressure off of import prices." Also trimming concerns about the inflation outlook are signs that expectations of higher prices "appear to be edging lower." Productivity will help too, she said.
The San Francisco bank president said risks to the economy could come from more shocks on the energy front, or from a worsening in the trade deficit.
Taming The Conundrum
Yellen also weighed in on the debate over finding an explanation for why long term bond yields have remained so low even when the Fed has been hiking interest rates for over a year now - Fed chairman Alan Greenspan's infamous "conundrum." Like Greenspan, she sees a number of different interpretations as possibilities, including the chance that markets may be predicting slower economic growth.
"We probably won't know the most important sources of this 'conundrum' until more time passes, but the causes of the conundrum do matter to monetary policy," Yellen said. If "the market is correct that the drags going forward will be unusually strong, a somewhat easier policy may be appropriate."
But if low yields reflect foreign buying and low inflation expectations, for example, "the federal funds rate probably needs to be somewhat higher than would otherwise be appropriate to offset the additional stimulus due to the flat yield curve," Yellen said. |
