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SF Fed Chief Warns on Using Monetary Policies to Shape Housing Market

Aug 20, 2015
Home in Hands Pic/Credit: violetkaipa

One of the top officials in the Federal Reserve System warned using monetary policies to address perceived problems in the housing market is a strategy with more than a few problems.

Speaking before the Bank Indonesia–BIS Conference in the Indonesian capital of Jakarta, San Francisco Federal Reserve John Williams warned that “sizable and significant effects on house prices in advanced economies” can result from adverse monetary policy shifts.

“That is, an increase in interest rates tends to lower real (inflation-adjusted) house prices,” said Williams. “This reduction in house prices comes at significant costs in terms of reductions in real gross domestic product and inflation.”

Williams noted that using monetary policy actions in regard to curbing the expansion of housing bubbles can work, but only when there is an overlap in macroeconomic and financial stability goals.

"For example, if the housing sector and the overall economy are both booming, then tighter monetary policy may serve to both reduce the risks to the financial system and keep economic activity from exceeding desired levels," Williams said.

Nonetheless, Williams warned that if monetary policy is being used to change interest rates, then it is important for changes to be proactive and not reactive to the economic environment.

“A typical estimate is that a one percent loss in GDP is associated with a four percent reduction in house prices,” Williams added. “This implies a very costly tradeoff of using monetary policy to affect house prices when macroeconomic and financial stability goals are in conflict.”

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Aug 20, 2015
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