Fed Advisors Warn Rate Increase Could Slow Housing

Bankers advising the Federal Reserve this month said they expect the central bank’s record accommodation to last as long as three years, while warning that an interest-rate increase could slow the housing recovery.

The Federal Advisory Council said “it is likely that current policy accommodation will continue for one to three years,” given current economic forecasts, fiscal policy restraint and subdued inflation, according to minutes of its May 17 meeting released today in Washington.

“Interest rate increases could damage the current momentum” in housing, which is “slowly recovering” amid a rebound in prices related to low inventories, the bankers said. While low interest rates have made home ownership more attractive to some, the panel warned record Fed stimulus may be “perceived as integral” to housing finance.

Rising demand pushed up the S&P/Case-Shiller index of property values in 20 cities by 10.9 percent in the year through March, the biggest 12-month gain since April 2006. The housing rebound is spurring the expansion and boosting consumer sentiment. The Conference Board’s consumer-confidence index climbed to the highest level in more than five years in May, data from the New York-based private research group showed.

The advisory council includes Joseph Hooley, chairman and chief executive officer of State Street Corp. in Boston; James Gorman, chairman and CEO of Morgan Stanley in New York; Kelly King, chairman and CEO of BB&T Corp. in Winston-Salem, N.C.; and D. Bryan Jordan, chairman and CEO of First Horizon National Corp. in Memphis, according to the Fed’s website.

The panel said the biggest lenders are tightening mortgage standards and increasing the credit scores and documentation required for loans, according to the minutes. Fannie Mae and Freddie Mac aren’t moving quickly enough to foreclose on delinquent loans, they said.

“One member expresses concern that Fannie Mae, Freddie Mac, and others continue to hold a significant number of underperforming loans and are not taking foreclosure actions,” according to the minutes. “This is skewing the positive market- condition data and creating a potential future challenge.”

Automatic U.S budget cuts, part of a process known as sequestration, aren’t harming the economy so far, the panel said. The impact of the reductions, which will slice the federal budget as much as $1.2 trillion over nine years, are difficult to assess as just 3% of businesses reported a direct effect, the panel said.

“There was nearly unanimous consensus that the sequestration has had little direct business impact so far,” according to the minutes. “With the specific exception of the Washington D.C. metro area, no member indicated material measurable impact from the sequester.”