Fed Cannot Ignore Harm Caused by Housing Bust

by 21 Sep 2012


(CNBC) -- The U.S. central bank would be courting disaster if it pursued a so-called nominal growth target that did not take into account the economic damage done by the housing crisis, a senior Federal Reserve official warned on Thursday.

James Bullard, president of the St. Louis Federal Reserve Bank, also argued that the only variable in the economy the Fed could control over the longer term was inflation, saying it did best when focusing solely on that goal.

Bullard, in a lecture at the University of Notre Dame in Indiana, said the pre-crisis housing bubble had driven U.S. growth to levels that were not realistic to try to recapture. He cited work by economists Carmen Reinhart and Kenneth Rogoff that argue recoveries after a severe financial crisis are much slower.

"Attempting to target nominal (gross domestic product) without adjustment for the Reinhart-Rogoff effect could be an unmitigated disaster," Bullard said during his presentation.

Frustration with a slow decline in high U.S. unemployment has sparked calls by some economists for the Fed to target nominal GDP, which measures growth in output before adjustments for inflation. They argue this would help communicate a powerful commitment to do whatever it takes to restore growth to its pre-crisis levels.

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