Fed Not Aiming at Housing Bubble

By Greg McBride, CFA, Bankrate.com

The Federal Open Market Committee’s repeated interest-rate hikes have evoked comparisons to the last time the Fed was raising interest rates, which was amid a bubble in stock prices during 1999-2000. Then, there was the widespread belief that the Fed was acting to pop the stock market bubble. With a 10th Fed interest rate hike coming Aug. 9, and an unknown number of additional hikes to follow, the question comes up again and again: Is the Fed trying to pop the housing bubble?

A common perception is that the Fed was trying to pop the technology-and-Internet stock bubble by raising interest rates from June 1999 through May 2000. But the Fed’s rate increases then primarily were driven by inflation pressures and an overheating economy. The Consumer Price Index, or CPI, for the trailing 12-month period ended March 1999 was 1.7 percent. One year later, it had more than doubled to 3.8 percent. In that same period, the Producer Price Index, or PPI, roared from a 0.8 percent advance to 4.4 percent.

While the intent of Alan Greenspan and the Fed wasn’t to pop the stock bubble, they did issue warnings. Remember Greenspan’s famous “irrational exuberance” quip? That was December 1996. The market went up for the next three-and-a-half years.

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