The US debate on inflation has zeroed in on housing prices, and the focus on monetary policy has shifted from criticism of easy money in general to at least getting the Federal Reserve to stop inflating a real estate bubble.
Former Treasury Secretary Larry Summers, who is turning criticism of Fed policy into a new career, said on Friday that skyrocketing housing prices are “scary,” and the Fed should stop fueling the surge with its monthly purchase of $40 billion of mortgage-backed securities, which are keeping mortgage rates low despite strong demand.
“I cannot understand why the Federal Reserve, in the face of this, continues to be every month a major buyer of mortgage-backed securities,” Summers said in a television interview. “That is the ultimate in procyclical behavior.”
Unintended Consequences Playing Out
Even some Fed policymakers are expressing their concern. Boston Fed President Eric Rosengren warned last Monday that the U.S. cannot afford a boom-and-bust cycle in real estate.
“I’m not predicting that we’ll necessarily have a bust. But I do think it’s worth paying close attention to what’s happening in the housing market,” he said.
Buyers willing to pay in cash and forgo home inspections are winning bids for the increasingly expensive homes, Rosengren said, calling attention to some of the distortions in the residential market.
Dallas Fed chief Robert Kaplan continues to beat the drum on tapering asset purchases in general and has called attention specifically to the mortgage bond purchases.
“There are some unintended consequences and side effects of these purchases that we are seeing play out.”
James Bullard, head of the St. Louis Fed, weighed in already last month with a tentative suggestion to taper mortgage bond purchases first. “I’m leaning a little bit toward the idea that maybe we don’t need to be in mortgage-backed securities with a booming housing market and even a threatening housing bubble here,” he said.
Proponents of maintaining the purchases at the current level, such as Fed governor Lael Brainard, counter that the mortgage bond purchases contribute more generally to monetary support and there is little distinction from the government bond purchases over time.
Investors will be scouring the minutes of the mid-June meeting when they are released on Wednesday for indications of how this debate is going in the Federal Open Market Committee.
They will in general be looking for signs that policymakers are having second thoughts about inflation and monetary stimulus after economic projections released at that meeting showed several of them moving up the date to start increasing interest rates.
EU, UK Underestimating Inflation Danger?
Meanwhile, the European Central Bank will hold a special strategy meeting of the governing council this week to discuss its asset purchases, with conservative members calling for emergency bond purchases under the $1.85 trillion pandemic program to end on schedule in March, while others want the central bank to remain flexible.
Austrian central bank governor Robert Holzmann, a member of the ECB governing council, said last week that markets are anticipating an end to the emergency purchases in March and they are right, at least for now. The ECB also has the option of increasing its normal asset purchase program.
Another conservative central banker, Dutch governor Klaas Knot, who is also on the governing council, is warning about inflation, suggesting policymakers at the ECB are underestimating the danger.
“We should not overestimate our capacity to determine in advance what is temporary inflation and what is not,” he said in a Dutch newspaper interview.
“There are other scenarios conceivable than our base case of persistently low inflation. Inflation is not dead.”
Andy Haldane, who left his post as chief economist at the Bank of England last week, reiterated his warning about possible consequences of surging inflation in the UK. Haldane once again dismissed the central bank’s official line that the inflation increase is temporary, and called attention instead to the lessons of history.
“Localized price pressures turned into generalized price pressures and those temporary spikes in prices morphed into more persistent rises in prices,” he said. “The key takeaway policy-wise is to nip that process in the bud.”