What Keeps Central Bankers Up at Night?

The Fed certainly isn't saying.

What keeps central bankers up at night? The Fed isn’t saying. The central bank doesn’t use that kind of idiom, for one thing, but more fundamentally the Fed goes out of its way to issue bland, calming statements about the economy, its plans and pretty much everything. If a large asteroid were on a collision course with the Earth, the Federal Reserve would call it a “circumstance of concern, with a potentially adverse impact on the world’s economic outlook.” (And the pun would be completely unintentional.) So Feb observers need to look pretty closely at its statements to ferret out what might really concern the central bank.

A recent example that concerns real estate: “Valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly, and underwriting standards at banks and in commercial mortgage-backed securities have been loosening,” the Fed said last week in its latest semiannual report to Congress. So it looks like CRE is some kind of concern for the central bank, along with loosening loan standards in the industry (which did no good at all for the residential side of the business back in the 2000s.). Does that mean the Fed sees a bubble, or a potential bubble, in commercial real prices? It would never use such a crass term, but maybe so.

Or maybe not. It’s also possible that the central bank is building another one of its arguments for an interest rate increase in the fall. After all, if a CRE bubble is of concern; and that bubble is riding on a wave of easy credit; then a small increase in interest rates might help defuse the situation. That would hardly be the only argument that the Fed will use to justify a rate increase, but it might be one of them.

The Fed’s statement had other things to say about credit as well, including the implication that a subprime-fueled residential bubble isn’t going to be a problem this time around. Credit flows to large nonfinancial businesses have remained solid, and financing generally appears to have become available to small businesses as well, the central bank noted. On the other hand, “Credit conditions for households have been mixed: While the availability of  mortgage loans continues to expand gradually, mortgages remain relatively difficult to obtain for some individuals, and credit card lending standards and terms are tight for borrowers with below-prime scores.”