Declines Mean ‘Substantial Correction' In Domestic Housing Market

Federal Reserve Chairman Ben Bernanke on Wednesday ratcheted up the central bank's recognition of the extent of the American housing market weakness, calling recent declines a "substantial correction."

Weaker housing will probably shave about one percentage point off gross domestic product growth in the second half of this year, Mr. Bernanke said in response to questions following a speech in Washington, adding that it will likely weigh on 2007 growth as well.

He did note, however, that outside of housing, other sectors of the economy remain "relatively strong."

Mr. Bernanke's remarks about a "substantial" housing correction were more strongly worded than the most recent Fed pronouncement on interest rates and the economy. In its policy statement September 20, the Fed referred to a "cooling" in housing. Before that meeting, it cited a "gradual" cooling in policy statements.

The Fed last month kept the federal funds rate at 5.25% for a second straight meeting. Economists expect the funds rate to remain there through the end of the year, with expectations growing that the Fed's next move will be a rate cut in 2007, partly reflecting the effects of the housing slowdown.

Over the long run, good job and income growth and low mortgage rates should support housing, Mr. Bernanke said.

The Fed chairman reiterated the Federal Open Market Committee's recent assessment that while inflation remains a risk, it should moderate over time.

Inflation "is still above what we would consider price stability," Mr. Bernanke said.

He added the Fed must stay on guard to ensure that inflation doesn't elevate, "or even remain where it is."

The Fed's preferred inflation gauge — the personal consumption expenditures price index excluding food and energy — is currently running at a 2.5% year-on-year rate, which is above the Fed's understood comfort range of 1% to 2%.