If you've been following the debate over where the FOMC is heading and you want to know why it's so hard to know where the neutral rate is, you might want to read this short letter from the San Francisco Fed.
In other news, I'm not the only one who thinks that housing prices are not driving the Fed's agenda.
I would agree that the fed does not target house prices directly. But dont they have to target house prices indirectly? I.e. if asset inflation is indeed spilling to price inflation I would think they should target both kinds of inflation. Propensity to consume is nicely correlated with house appreciation so I would think that housing is one of the factors the fed must consider while trying to figure out what the neutral funds rate is.
Recall that Greenspan stuck his head in Raine's business and advised the public that ARMs would be a good way to finance their homes-to-be. The Fed cannot now say that they made a mistake in that advice --only that there are a few mortgage holders who will be adversely affected by rising mortgage rates.
There may be class action law suits yet, but I hardly expect them to invite one by claiming that they are going to scrap the marginal home owners, many who opted for ARMs, in the name of price stability and full employment.
Can we imagine the core inflation without the housing inflation and the refi that is financing it? The conspicuous thing is the non-inflating wages, no? Were it not for the equity extraction from the house, the consumer has no means for paying the higher prices.
There are few things that seem this clear to me. The first pause in (national) house price appreciation will be enough to stall the incrementing of the prime rate IMHO.