The head of the St Louis Federal Reserve, James Bullard, made the comment in a speech today that the “peak in U.S. housing prices represented an overvaluation”. That may be obvious to almost all observers of a market in which the value of many homes doubled over the period from the late 1990s to 2005/2006. But, it is also possible that, if the drop in prices were a temporary aberration, prices should rebound quickly to where they were five years ago. Bullard rules that out.
He also made comments about the the Fed’s real ability to influence the strength of the economy. His argument is that the Fed’s role can never be more than modest.
Inflation targeting emphasizes control over inflation as the key long-term goal of monetary policy. This makes sense because the central bank can only influence inflation and not any real macroeconomic variable in the long run. As is well known, the actions of the FOMC can also temporarily influence the direction of the economy in the short run, but only temporarily. This influence can be used to help mitigate short-run gyrations in economic activity, thus smoothing out an otherwise bumpy ride for U.S. households and businesses.
Those who think that the Fed’s financing of banks at the end of 2008 and the decision to put QE1 and QE2 in place might disagree. The Fed, in the minds of some has done much more than temporarily influence the direction of the economy
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