Tags: housing | bubble | federal reserve | mistake

Economist Cummins: Fed Risks Repeating 'Its Biggest Mistake of Past Decade'

By    |   Sunday, 14 June 2015 05:27 PM

The Federal Reserve has pledged to continue moving very slowly in raising short-term interest rates, which have stood at a record low for more than six years.

Unfortunately, that stance threatens to ignite the second real estate bubble in a decade, says Jason Cummins, chief U.S. economist for European hedge fund titan Brevan Howard.

"The risk [is] that the Federal Reserve will repeat its biggest mistake of the past decade," he writes in the Financial Times.

U.S housing prices are rising 7 percent a year, averaging just 10 percent less than their peak level of 2006, Cummins notes.

"There are good macroeconomic reasons to stimulate aggregate demand through an interest-rate sensitive sector like housing," Cummins maintains. The economy contracted 0.7 percent in the first quarter.

"However, such a strategy is not without risks," he says. "

"To delay normalization of interest rates is to risk repeating the mistake of the last business cycle, which was to create a house price bubble that overburdened many households. And the bigger the housing bubble gets, the greater the risk of a crash once rates are normalized."

Economists don't expect the Fed to raise rates before September.

But former Federal Reserve Chairman Alan Greenspan is more worried about weakness in the housing sector.

He notes that the pace for new construction of both homes and commercial properties hasn't returned to the lofty levels that prevailed before the 2008 financial crisis.

"We haven't come out of the bottom," Greenspan told CNNMoney. "We are in the position now of secular stagnation" for real estate.

Before the 2007-09 Great Recession construction of homes and buildings expected to last for 20-plus years accounted for 8 percent of GDP. Now it's only 4 percent, Greenspan notes.

And that's bad news for the overall economy, because real estate construction played a key role in each of the 10 rebounds from recession since World War II, Greenspan explained.

The Atlanta Fed's forecasting model puts second-quarter GDP growth at only 1.1 percent.

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The Federal Reserve has pledged to continue moving very slowly in raising short-term interest rates, which have stood at a record low for more than six years.
housing, bubble, federal reserve, mistake
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2015-27-14
Sunday, 14 June 2015 05:27 PM
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