Central banks should focus on house price swings only if they risk causing harm to the broader economy, and keep their eyes on ensuring stable prices and employment, Federal Reserve Governor Frederic Mishkin said on Saturday.
"The serious doubts about ... assumptions needed to justify a special monetary policy focus on house prices constitute a strong argument for monetary policy-makers to instead maintain their efforts to stabilise inflation and employment without such a special focus," Mishkin said in remarks prepared for delivery to a conference here organised by the Kansas City Federal Reserve Bank.
A drop in housing starts in the United States since January 2006 is estimated to have shaved a full percentage point off the nation's gross domestic product, Mishkin said.
Big gains in house prices around the world in the last two decades raise worries about further hits to economic growth if price gains are reversed, he said. Mishkin's comments come as US house prices are stagnant or falling in many parts of the country, contributing to a sharp rise in delinquencies in the subprime mortgage market that serves borrowers with patchy credit histories.
Fed Chairman Ben Bernanke, in a speech to the same conference on Friday, said the US central bank stands ready to act as necessary to limit adverse impacts on the broader economy from financial turbulence linked to losses in mortgage markets.
Mishkin said in spite of tighter credit and a rise in risk-aversion as a result of subprime mortgage delinquencies, the economy seems well-buffered against upheaval.
"Fortunately, the overall financial system appears to be in good health, and the US banking system is well positioned to withstand stressful market conditions," he said. Mishkin said a central bank should not try to stop an asset bubble from bursting, but to respond quickly after it has burst.
"As long as monetary policy authorities watch carefully for harmful effects stemming from the bursting bubble and respond to them in a timely fashion, then the harmful effects can probably be kept to a manageable level," he said.