Fed Felt Hamstrung By 2005 Housing Bubble
Author: Sudeep Reddy</br></br>WASHINGTON--Federal Reserve officials acknowledged a housing-market bubble more than a year before U.S. house prices peaked, but they showed little inclination to address it, according to transcripts of their 2005 meetings released Friday.</br></br>During 2005, the Fed raised interest rates a quarter-percentage point at every meeting, unwinding the ultra-loose policy it pursued earlier in the decade to address deflation worries after the 2001 recession. The economy at the time was growing at a healthy pace with few signs of overheating. But with reports across the U.S. indicating a bubble in the housing market, the Federal Open Market Committee spent time assessing the appreciation in home prices and what, if anything, the Fed could do about it. Fed staff economists had found that housing might be overvalued by as much as 20%, based on the historical relationship between prices and rents.</br></br>But Fed officials appeared hamstrung because they believed their most important tool--interest rates--could not address frothy housing markets alone without influencing the broader economy.</br></br>"I get very irritated when I see columns suggesting that we are trying to inspire or should be trying to prick a housing bubble," said Fed Governor Edward Gramlich, who died in 2007. "There is no way to do that and still maximize the inflation/unemployment outcome. Monetary policy is broad and has broad effects."