Few people speak with as much precision about uncertainty as central bankers. Janet Yellen, president of the San Francisco Federal Reserve Bank, gave a speech Monday to the Hong Kong Association of Northern California that finishes with the following gem:
"You will note that I am casting my statements about the stance of policy and the outlook in very conditional terms. I do this because of the great uncertainty that surrounds these issues. Frankly, all approaches to assessing the stance of policy are inherently imprecise. Just as imprecise is our understanding of how long the lags will be between our policy actions and their impacts on the economy and inflation. This uncertainty argues, then, for policy to be responsive to the data as it emerges, especially as we get within range of the desired policy setting. The decision to pause allows us more time to observe the data so that appropriate adjustments can be made over time. For example, with the passage of time, we will gain more information on whether we have done enough to assure that inflation moves gradually lower."
She's talking about the Federal Reserve's decision at its last meeting to neither raise nor lower interest rates. And she's saying, with truly exquisite precision: "We'll see what happens next, and then do something else. Or not."
One can understand her caution, given how the markets tend to react when a central banker strays even the most microscopic bit from the straight and narrow. Which is one reason why my eyebrows jumped when I read her comments yesterday on the California housing market. (Thanks to the Housing Bubble Blog for the tip.)
Last week, former Fed Reserve chairman Alan Greenspan speculated that "the worst might be over" with respect to the housing bust. He based his analysis on a recent flattening out of the decline in new mortgage applications. But Yellen, after noting that in the first half of this year, "quarterly average home sales in California are down nearly four times as much as they are nationwide," said her contacts are "willing to bet that things will get worse before they get better." The data we already have is "actually 'behind the curve.'"
"For example, a major home builder has told me that the share of unsold homes has topped 80 percent in some of the new subdivisions around Phoenix and Las Vegas, which he labeled the new 'ghost towns' of the West. Though the situation isn't that bad everywhere, a significant buildup of home inventory implies that permits and starts may continue to fall and the market may not recover for several years."
If one was of a cynical bent, one might suspect Greenspan of dearly wanting the worst to be over for the housing market, because some observers hold his easy money regime of the early 2000s responsible for the excesses of the housing boom. Should the housing bust worsen, and eventually drive the U.S. into recession, fingers will get pointed, with some precision, at him.