Is Fed Policy Spurring Excess Risk-Taking?

The Federal Reserve's accommodative monetary policy is generating "excessive risk-taking" in the financial markets and possibly fueling speculative demand for single homes and condominiums, according to some members of the Fed's interest rate-setting group.The minutes of the Dec. 14 meeting of the Federal Open Market Committee reveal that some members raised concerns that interest rates on Treasury notes have remained low despite incremental increases in the target federal funds rate over the past year to 2.25%. These members say they believe the "prolonged period of accommodation has generated a significant degree of liquidity that might be contributing to signs of excessive risk-taking in financial markets evidenced by quite narrow credit spreads," according to the minutes, including "anecdotal reports that speculative demands were becoming apparent in the markets for single-family homes and condominiums." Fannie Mae economists recently reported that their economic models couldn't justify the sudden acceleration in housing prices during the first three quarters of 2004. They said they suspect that adjustable-rate financing is helping to fuel speculative demand and driving up housing prices.