“My sense is that the housing debacle of the past five years may have scared off a generation of potential homeowners,” Bullard said today in a speech in New York. “New home buyers likely see homeownership as a fundamentally riskier proposition than earlier cohorts and therefore may be far more likely to rent rather than own.”

Fed Chairman Ben S. Bernanke told homebuilders in Orlando, Florida, this month that the U.S. recovery has been “frustratingly slow” in part because weak housing markets are holding back consumer spending. The Federal Open Market Committee said Jan. 25 subdued inflation and economic slack are likely to warrant keeping rates near zero at least through late 2014, extending a previous date of mid-2013 or later.

Bullard indicated that a monetary policy aimed at lowering interest rates and encouraging borrowing may not be suitable at a time when families are trying to reduce their debt.

“One of the fundamental tensions in current U.S. macroeconomic policy is the tendency to push against the need to reduce household debt levels,” Bullard said at the U.S. Monetary Policy Forum hosted by the University of Chicago Booth School of Business. “Seemingly paradoxical policy” encourages “borrowing in the context of an economy with too much borrowing.”

‘Large Wedge’

Bullard commented in response to a research paper concluding that falling home prices and tight credit have impaired the Fed’s ability to stimulate growth by introducing “a large wedge” between the target rate and the borrowing rate for households. The paper was written by Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., and Ethan Harris, co- head of global economic research at Bank of America Corp.

Economic reports today added to evidence of a strengthening economy.

The Thomson Reuters/University of Michigan final index of consumer sentiment increased to 75.3 this month from 75 in January. The median estimate in a Bloomberg News survey called for 73, after a preliminary reading of 72.5.

Purchases of new homes declined 0.9 percent in January to a 321,000 annual rate from a 324,000 pace in December that was stronger than previously reported, Commerce Department figures showed today. The median estimate in a Bloomberg survey called for 315,000 pace last month.

Stocks Climb

The S&P 500 increased 0.1 percent to 1,365.16 at 3:27 p.m. New York time, paring an earlier advance of as much as 0.4 percent. The benchmark gauge exceeded its April 2011 peak of 1,363.61, which was the highest level since June 2008.

The St. Louis Fed president repeated his view that the amount of slack in the U.S. economy may be considerably less than most economists estimate because growth was artificially boosted by the housing bubble. Attempts to lift the economy “back to trend” before the recession “will not be very effective,” he said.

“The situation in U.S. housing markets represents a quantitatively significant headwind,” Bullard said, citing the authors’ view that “improvement is likely to be very slow” and “there is no presumption that a booming housing market would be desirable in the aftermath of the collapse of the bubble.”

Bullard, who doesn’t vote on monetary policy this year, was the first Fed official in 2010 to call for a second round of asset purchases by the central bank.

Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

http://www.bloomberg.com/news/2012-02-24/housing-declines-may-have-cost-a-generation-of-buyers-fed-s-bullard-says.html

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