Bloomberg News

Fed’s Dudley Calls for Breaking ‘Vicious Cycle’ in Housing

October 24, 2011

Oct. 24 (Bloomberg) -- Federal Reserve Bank of New York President William C. Dudley said falling home prices pose “a serious impediment to a stronger economic recovery” and predicted “continued modest growth” for the U.S.

“Continued house price declines could lead to even more defaults, foreclosures and distress sales, undermining wealth, confidence and spending,” Dudley said in the text of remarks given at Fordham University in the Bronx today. “Breaking this vicious cycle is one of the most pressing issues facing policy makers.”

Fed officials are developing options for further monetary easing even as better-than-forecast economic reports have allayed concerns the U.S. may relapse into a recession. Fed Vice Chairman Janet Yellen said last week that a third round of large-scale asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.” Governor Daniel Tarullo said buying mortgage-backed securities “should move back up toward the top of the list of options.”

“Our economy continues to face some serious headwinds,” including from government spending cuts and the sovereign debt crisis in Europe, Dudley said. “The Fed is doing -- and will continue to do -- everything within its power to promote jobs and price stability.”

Near Zero

In August, the Fed pledged to hold interest rates near zero until at least mid-2013, and last month the central bank said it would swap $400 billion of short-term debt in its portfolio for longer-term securities in order to bring down interest rates, a strategy dubbed Operation Twist.

“I believe that the actions we have taken recently will be helpful in supporting growth and jobs,” Dudley said. “However, I do not think that monetary policy is all-powerful. To get the strongest possible recovery we need reinforcing action in areas such as housing and fiscal policy.”

Bolstering the housing market is “particularly important” because it’s a key factor in household wealth, he said.

“This calls for a comprehensive approach to housing policy, starting with an urgent effort to remove the obstacles that make it difficult for all borrowers to refinance at today’s low mortgage rates, but extending beyond this to tackle other problems weighing on housing,” Dudley said.

“A vicious cycle could be replaced by a virtuous circle, in which stabilization in house prices supports spending, growth and jobs,” he said, adding it’s “important” the government address its fiscal shortfalls “in a manner that is credible and supports economic recovery,” Dudley said.

Growth this year has been “disappointing,” and “there remain significant downside risks,” Dudley said. He repeated his view that the recovery slowed in part because of “temporary factors,” such as energy and commodity prices rising “sharply” and the earthquake and tsunami in Japan.

The inflation rate will probably fall this year and in 2012, “barring more energy-price jumps,” he said.

--Editors: James Tyson, Christopher Wellisz

To contact the reporter on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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