The Federal Reserve board members have argued that asset bubbles are hard to identify when they’re growing. In retrospect, though, St. Louis Fed president James Bullard is calling a bubble a bubble.
Asked by Fox Business News about the housing market recovery, Mr Bullard made clear he wasn’t holding his breath waiting for the market to pick back up.
We have too many houses, so I wouldn’t expect that to really boom on us.
Housing prices have “by and large” stabilised, he said. And even there, he hedged. Prices have stabilised “compared to what they were doing the past couple years” and the Fed was watching the recent mixed data “very carefully.”
But, he said, the measures the Fed has taken to support the housing market, including buying $1,250bn in mortgage backed securities will likely be winding down (though, he made clear, not immediately).
If Mr Bullard’s hedging is meant to suggest that he sees some risk that the bubble hasn’t fully deflated, removing support from MBS could precipitate a further correction. Unless, of course, someone else steps in, which Treasury looks primed to do after announcing in December that Fannie Mae and Freddie Mac, the troubled mortgage giants, now have an unlimited government credit line and are able to buy more mortgage backed securities.
Mr Bullard expressed open skepticism as to the health of the government-sponsored entities, saying “we need to face up to our problems.” (And he’s not the first one to raise alarm bells).
Other highlights of the candid interview:
- “The era of potential deflation is behind us,” he said. Instead, he said, inflation expectations were rising in the medium term.
- It’s going to be “awhile” before employment returns to normal levels.
- Normally it takes the Fed 2.5 to 3 years after a recession ends to raise rates. But criticism that the Fed’s reluctance to raise rates fed into asset bubbles will be a “big factor in how the committee plays this going forward.” He also suggested that the Fed may reduce its quantitative easing measures before raising rates (which would be no surprise).
