Fed chiefs see ‘correction’ in US housing

Fed chiefs see ‘correction’ in US housing
By Krishna Guha in Washington and Ben White in New York
Copyright The Financial Times Limited 2006
Published: October 4 2006 17:43 | Last updated: October 4 2006 22:02


A “substantial correction” in the US housing market is under way but so far it has not had a big effect on the rest of the economy, the two top officials at the Federal Reserve said on Wednesday.

In separate remarks Ben Bernanke, the Fed chairman, and Don Kohn, the Fed vice-chairman, each said it was very difficult to predict what the ultimate impact of the housing slowdown on growth and consumption would be. They noted that new residential construction had already fallen sharply and housing weakness could spill over into other sectors in the months ahead.

But both said that for now at least, there was substantial off-setting strength in other sectors, including non-residential construction. At the same time, the two top Fed officials stressed that they remain concerned about inflation.

Mr Bernanke said that while he expects inflation to decline “it is something that we have to watch very carefully to make sure that it does not rise or even remain where it is”.

Mr Kohn went further, restating that “in the current circumstances, the upside risks to inflation are of greater concern” than the downside risks to growth from housing.

While the analysis presented by the two is consistent, Mr Kohn’s more detailed remarks raise the possibility that he is a little less concerned about the housing slowdown than Mr Bernanke.

Taken together, the comments undermine any suggestion that the Fed is already leaning towards interest rate cuts. Rather, they suggest it is likely to remain on pause for what could be an extended period while policymakers evaluate incoming data on growth and inflation.

Breaking more than a month of silence on the US economy, Mr Bernanke told the Economic Club of Washington that the decline in US residential construction would subtract “about one percentage point” from growth in the second half of this year and “probably something going into next year as well”.

However, he said that up to this point, non-housing related sectors remained “relatively strong”.

Mr Bernanke said the key questions for the Fed were how far the housing market correction would go and the extent to which it would spill over into other sectors of the economy.

He said it was “very difficult” to predict when the housing market would stabilise, with would-be buyers remaining on the sidelines because of fears that prices might decline. But he said there were “strong fundamentals” underpinning the housing market, including low unemployment, rising wages and demographic shifts.

Mr Bernanke’s remarks were made after a speech in which he called for a national effort to raise US savings to minimise the cost of an ageing population to future generations.

Meanwhile Mr Kohn, in a speech to the Money Marketeers association of New York, argued that the housing adjustment, though painful, could be brief and the US economy was heading for a soft landing.

He said the sharp decline in residential construction should help rebalance supply and demand and said population dynamics suggested “starts may be closer to their trough than their peak”.

Historically, moderate interest rates and rising real incomes should also underpin the market, he said.