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Fed's Plosser: Housing Won't Have 'Significant Spillover Effect'

There are not likely to be "significant spillover effects" from the housing crunch to the rest of the economy or the financial system, Philadelphia Federal Reserve Bank president Charles Plosser said Wednesday.

Housing's drag on the US economy should "diminish but continue until sometime next year," he said in notes for a London speech released to reporters by the Philadelphia Fed.

One reason, he thinks, is that "the widely reported headline numbers overstate the decline in home prices."

As far as the financial effects, despite the recent sub-prime problems, "the financial system has not shown significant strain." How severe the effects may be on hedge funds remains to be seen, Plosser said.

Given the potential "dire consequences," should central bankers try to "prick the bubble" in housing or other assets? "My short answer to this question is no," he said.

In order for central bankers to do anything, he argued, "they first have to determine if, in fact, there is a bubble. In my mind, this turns out to be an overwhelming hurdle."

"What happens if central bankers raise rates and home prices do not decelerate, do they raise rates again?" Plosser asked. He also asked whether central bankers know what rate of house price appreciation is right.

Plosser queried what kind of damage could they do to other parts of the economy by trying to restrain housing.

In light of those questions, Plosser doubts monetary policy could be effective at restraining a boom.

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