Keep your eye on real estate prices if you want to know what the Fed’s planning these days.
The advice was dispensed this morning by Wayne Angell, a former Federal Reserve governor who spoke at a press conference today at the United Nations for the launch of a new set of Dow Jones Wilshire global indices. Responding to a question by your editor on the future of monetary policy, Angell said that the Fed’s monetary response will unfold based largely on what happens to housing prices in the coming months. Intrigued, yours truly pressed the former chief economist at Bear Stearns on the matter.
In particular, we wondered how the Fed might balance the fact that housing prices can change quickly (up and down) while monetary policy and its effects arrive at a relatively glacial pace. Arguably, the rise in core inflation of late is a reflection of the loose monetary bias of several years ago, when the central bank was consumed with fighting deflation. Angell, in fact, said as much. As to what’s coming in monetary policy vis a vis housing, he responded first by posing some questions:

Will the annual rate of decline in housing prices stay at negative 2 percent? Or is it more likely to go to negative 15%? Or negative 30%? The answer will dictate the Federal Reserve’s next move

Angell went on to say that there’s a risk that the Fed remains too focused on the recent past. The rise in core inflation is in fact a lagging indicator. As he pointed out, the jump in core CPI was baked into the system 24 months ago. The challenge, as always, for the Fed is balancing lagging indicators with monetary decisions today–decisions that will have an impact over the next 24 months or so. To the extent the Fed stumbles with finding the right balance, the result can be recession, he noted.
Angell was also asked by another journalist if he’d cut interest rates now. His answer was “no.” He reasoned that the “Fed must prepare the markets” before a cut, which he suggested will come in the first quarter. The preparation will come through communications by Fed Chairman Bernanke and other representatives of the central bank. Perhaps a fresh clue will come in today’s FOMC announcement, due in a few hours as we write.
Meanwhile, speaking of housing prices, the national median price for single-family homes dropped 2.5% in September 2006 vs. the year-earlier figure, the National Association of Realtors announced today. That’s the largest decline on record. The good news, such as it is: we’re still a long way from a 15% or 30% decline.