By Jonathan Nicholson
WASHINGTON, Feb 28 (Reuters) - Federal Reserve governor Donald Kohn said late on Friday there was little reason to worry that current low interest rates may cause a potential bubble in the rate-sensitive housing and auto markets.
"The rise in housing prices and the increase in household investment in houses and consumer durables do not appear out of line with what might be expected in the current environment of low interest rates and continuing growth in real disposable incomes," said Kohn in prepared remarks to be delivered to an economic conference in San Francisco. The conference was sponsored by the Federal Reserve Bank of San Francisco and the Stanford Institute for Economic Policy Research.
The speech was closed to the press, but the Fed made his prepared remarks available to reporters in Washington.
After the stock market bubble burst in 2000, leading the U.S. economy into a recession in 2001, many economists have been worried that the strong growth seen in the housing market recently could end the same way. At the same time, automakers have used low interest rates to lure car buyers, boosting sales but leaving some wondering who will buy when the incentives end.
While Kohn acknowledged the housing and auto sectors may not provide the boost to economic activity ahead as they have in past recoveries, "they do not appear set to replicate the experience of fiber-optic cable," he said. The massive investment in fiber optic cable, much of it remaining unused, has often been cited as a symbol of businesses' willingness to overinvest during the late Nineties.
"It makes sense to build the houses and cars now, when the cost of doing so is relatively low, rather than waiting. And building them now has kept more people employed and reduced the risk of deflation," he said.
Kohn, while giving the usual disclaimer that he spoke only for himself, also hinted the Fed sees little chance that interest rates, at their lowest levels since 1961, will remain low indefinitely.
"Few see interest rates as holding at current rates indefinitely. When, at some point, interest rates rise to more typical levels, desired stocks of (houses and cars) likely would fall, holding other factors equal, restraining this interest-sensitive spending," he said.
The central bank would also have time to respond, he said, should the economy pick up steam faster than expected, or inflation begin to appear.
"With production currently well below potential and inflation and inflation expectations low, it is doubtful that the temporary misalignment of rates would result in the development of any perceptible inflation pressures before the Federal Reserve would have time to take countervailing steps."