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Who’s afraid of depressing asset prices by raising overnight rates?
Alan Greenspan has repeatedly said that raising overnight rates wouldn’t have been effective in mitigating the housing bubble. But it turns out that at least one member of the FOMC worried in a 2003 meeting that that was exactly what would happen should the Fed raise rates too quickly.
Jack Guynn, then president of the Atlanta Fed, said in a December 2003 meeting, according to its transcript:
Approximately 40 percent of the increase in GDP since the trough is due to housing and durable goods purchases, which usually need to be financed and were clearly encouraged and supported by low interest rates. Measures of consumer debt produced by the Board’s staff show that consumers clearly have increased their debt burdens and their financial obligation ratios. Delinquency rates on subprime mortgages far exceed those of other mortgages. Finally, while credit card lenders remain profitable, their chargeoff ratios are now approaching 7 percent. As a result, current profit levels are being maintained by low commercial paper funding costs and not by increased charges on loans.
Should we raise rates too high too quickly this time, we risk choking off demand for housing and durables, a situation that will be exacerbated by a profit squeeze on lenders, particularly credit card lenders, who will be forced to curtail lending or tighten standards.
Of course, Mr Guynn may have been in the minority view, and we’ll have to wait a few more months to see the full transcripts from the meetings in 2004, when rates began to rise. But it’s significant that, at least, one argument for keeping interest rates lower was to prop up a housing market that was overheating.
Tags: asset bubble, greenspan, guynn, housing bubble, housing prices
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