Analysts: Fed actions boosted inflation, housing prices

ST. LOUIS – Federal Reserve decisions earlier this decade increased U.S. inflation rates and helped create the housing boom that preceded the current bust, two European Central Bank economists have concluded, according to Bloomberg News.
“Monetary policy has significant effects on residential investment and house prices,” analysts Marek Jarocinski and Frank Smets wrote in the paper they presented at a Fed conference today, but its impact on the wider economy is “limited.”
“Easy monetary policy designed to stave off perceived risks of deflation in 2002 to 2004 has contributed to the boom in the housing market in 2004 and 2005,” the ECB analysts wrote. In 2003, the Federal Open Market Committee lowered the benchmark federal funds rate to 1 percent – its lowest level in more than four decades – to spur economic growth and avert the threat of deflation. Economic growth and commodity prices subsequently surged, driving the inflation rate to above the Fed’s preferred level for about three years.
Without the FOMC’s action, Jarocinski and Smets contend, “inflation would have been about 25 basis points [0.25 percentage points] lower at the end of 2006.”