Fed Won’t Target Housing Market

Federal Reserve policymakers will not use monetary methods to deflate what some economists say is a bubble in the U.S. housing market, according to minutes of the central bank’s June 29-30 meeting, released Thursday.

The revelation came as Fed Chairman Alan Greenspan on Thursday said the cooling of home prices in some regions could have a negative effect on consumer spending, both locally and nationally.

But Greenspan also reiterated his view that economic growth is solid, inflation is well-contained and the Fed intends to continue raising interest rates to keep inflation at bay.

Testifying before the Senate Banking Committee on Thursday, Greenspan said the extraction of equity from residential property in the form of sales, refinancings and home equity loans has been fueling consumer spending and would slow down as markets cool.

“In the event that you begin to get a retrenchment in house turnover, which would presumably be associated with the unwinding of a frothy market, it probably also impacts on consumer expenditures in that particular area,” Greenspan said.

Greenspan added that exotic mortgage products that reduce monthly payments for home buyers, such as interest-only loans and adjustable-rate mortgages, were not a large enough part of the market to create serious systemic problems.

The minutes of the last Fed rate-setting meeting indicated that the Fed believes that targeting any asset bubbles, such as in housing, would be counterproductive.

“A strategy of responding more directly to possible [asset] mispricing was seen as very unlikely to contribute, on balance, to the achievement of the [interest-rate-setting] committee’s goals,” the minutes said.

On June 30, the Fed raised its benchmark U.S. interest rate a quarter-point to 3.25%.

Bloomberg News and Reuters were used in compiling this report.