WASHINGTON A renewed bout of weakness in housing will make it more difficult for the Federal Reserve to think about selling mortgage assets when it decides to begin to withdraw monetary stimulus, a top Fed official said on Friday.
James Bullard, president of the St. Louis Federal Reserve Bank, told Reuters on the sidelines of a Fed board conference that the U.S. economy was, nonetheless, still on track for modest growth.
"We continue to be on track for a reasonable recovery," Bullard said. "We're not going to be V-shaped or have real robust growth but we are going to have growth."
The health of the housing market, which was at the epicenter of the financial crisis, will nevertheless play a key role for the U.S. central bank as it mulls the best way to unwind its emergency policies.
"It's making me nervous," Bullard said of the beleaguered sector. "I will be interested in seeing the (upcoming) data, and if that begins to not look good then I'll start to wonder."
Bullard said he does not foresee any sharp rebound in housing activity, and said a mere stabilization in prices and sales would be enough of a signal that selling assets would not be too disruptive.
In an effort to combat the worst financial crisis in generations, the Fed not only slashed interest rates near zero percent but also embarked on an unprecedented emergency program, totaling some $1.7 trillion, of asset purchases aimed at keeping borrowing costs low and cushioning the housing sector.
These actions have led to a sharp rise in Fed credit to the banking system, which some economists worry has the potential to ignite future inflation, or at the very least complicated policy makers' task of removing monetary accommodation.
Bullard asked one of the economists presenting a paper at the conference, Columbia professor Michael Woodford, whether he believed the Fed would have to drain reserves even as it raises interest rates.
Woodford argued that reserve-draining operations such as reverse repurchase agreements were not strictly necessary, and that those advocating such operations were being "excessively cautious."
Asked about the crisis affecting Greece, whose heavy indebtedness has sparked widespread fears of renewed financial turmoil given a spike in sovereign borrowing more generally, Bullard was cautiously optimistic.
"So far I think we're OK. I wouldn't want to play it down too much," he said. "We played down other things too much during this crisis and it came back to bite us. So, we're watching it very carefully. But right now I don't see it having any feedback to the U.S."