elizabeth a duke : stabilizing the housing market – next steps speech by ms elizabeth a duke, member of the board of governors of the us federal reserve system, at the global association of risk professionals ’ risk management convention, new york, 11 february 2009. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * in the summer of 2007, the u. s. and global economies entered a period of unprecedented financial turmoil, which has since led to a significant slump in macroeconomic activity. problems in both the housing sector and the housing finance sector played a central role in precipitating the crisis, and ongoing weakness in housing activity, along with persistent strains in mortgage markets, continue to inhibit a broader recovery. in particular, we have entered a cycle where high levels of default on mortgage debt have led to a reduction in the availability of mortgage debt as well as a tightening of terms for it. this situation has led to lower levels of home sales and prices paid for homes, which, in turn, contributes to yet more defaults by borrowers. as financial risk managers, i am sure you are aware of the important steps that have already been taken to try to break this cycle, but that you also recognize the need to do more. my remarks today will focus on the next steps – efforts to increase demand for homes, efforts aimed at further reducing preventable foreclosures, and efforts aimed at limiting the costs imposed on households and communities by foreclosures that cannot be avoided. both the government and the private sector have important roles in these efforts. these suggestions and recommendations are my opinion alone and do not reflect the views of other members of the federal reserve board or any other government entity. the current weakness in housing markets housing activity remains extraordinarily weak. sales of new and existing homes have been running at a pace that is 60 percent of that seen at the peak in 2005. single - family housing starts are now less than one - quarter of their peak level. with the cutbacks in construction, inventories of unsold new homes have declined, but the months'supply – that is, inventories relative to sales – is still very high by historical standards. the inventory of existing homes for sale is also quite elevated – and it would be even higher if not for would - be sellers that have withheld or withdrawn their homes from the market amid poor selling conditions. we

indicators should be looked at to determine whether we had met the ‘ substantial further progress ” criteria we laid out in our december 2020 guidance. some of us concluded the labor market was healing fast and we pushed for earlier and faster withdrawal of accommodation. for others, data suggested the labor market was not - 7healing that fast and it was not optimal to withdraw policy accommodation soon. many of our critics tend to focus only on the inflation aspect of our mandate and ignore the employment leg of our mandate. but we cannot. so, what may appear as a policy error to some was viewed as appropriate policy by others based on their views regarding the health of the labor market. third, one must account for setting policy in real time. the committee was getting mixed signals from the labor market data in august and september. two consecutive weak job reports didn ’ t square with a rapidly falling unemployment rate. later that fall, and then with the labor department ’ s 2021 revisions, we found that payrolls were quite steady over the course of the year. as shown in table 2, revisions to changes in payroll employment since late last summer have been quite substantial. from the original reports to the current estimate, the change in payroll employment has been revised up nearly 1. 5 million. as the revisions came in, a consensus grew that the labor market was much stronger than we originally thought. if we knew then what we know now, i believe the committee would have accelerated tapering and raised rates sooner. but no one knew, and that ’ s the nature of making monetary policy in real time. finally, if one believes we were behind the curve in 2021, how far behind were we? in a world of forward guidance, one simply cannot look at the policy rate to judge the stance of policy. even though we did not actually move the policy rate in 2021, we used forward guidance to start raising market rates starting with the september 2021 statement, which indicated tapering was coming soon. the 2 - year treasury yield, which i view as a good market indicator of our policy stance, went from approximately 25 basis points in late september 2021 to 75 basis points by late december. that is the - 8equivalent, in my mind, of two 25 basis point policy rate hikes for impacting the financial markets. when looked at this way, how far behind the curve could we have possibly been if, using forward guidance, one views rate hikes effectively beginning in september 2021? slides for “ reflections on monetary policy