Economist: Fed has the Power to End Housing Slump

The Fed could prevent a lot of damage to the housing market and overall economy by acting swiftly to aggressively cut interest rates, says a Fed Board of Governors' member.
By: Peter Coy: REALTOR® Magazine Online
At least one influential economist is urging the Federal Reserve to cut interest rates quickly and preemptively.

Fed Board of Governors’ member Frederic S. Mishkin said in a white paper that the Fed could prevent a lot of damage from a severe housing slump by acting swiftly to cut interest rates aggressively before the slump gets any worse.

Mishkin says the harm that falling home prices do to the economy is predictable, so there's no value in waiting until the damage is done. By acting quickly, he says, the Fed can buoy consumer spending and minimize the loss in economic output while suffering only a small increase in the inflation rate. Such a policy, he writes, "can be extremely successful at counteracting the real effects of [a] very large housing slump."

The required cuts would actually be slightly less than the total under a typical monetary policy, he says, because they would forestall part of the economic decline. Rates would hit bottom about two years after a price decline begins. Under a traditional strategy, Mishkin says, rates wouldn't hit bottom until three or four years after a housing slump takes hold — and economic output would suffer a much bigger hit.