JACKSON HOLE, Wyoming – U.S. home prices could fall as the housing boom "inevitably" slows, Federal Reserve Chairman Alan Greenspan (search) said on Saturday as he cast doubt on central banks' ability to sway such asset values.
Greenspan offered the warning about the U.S. housing market in concluding remarks to an annual Kansas City Fed symposium (search), his last as Fed chairman and one focused this year on a retrospective of his 18-year tenure.
In unusually explicit terms, the central bank chief gave his reading of challenges he sees facing his still-unknown successor and laid out his own views on issues such as inflation targeting, fiscal policy and economic imbalances.
"The housing boom (search) will inevitably simmer down," Greenspan said in the prepared remarks. "As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease."
Greenspan said while he expects continuing debate over whether the Fed could and should use its power over interest rates to try to influence prices for assets such as stocks and homes, he did not think it was feasible to do so.
"The configuration of asset prices is already an integral part of our evaluation of the large array of forces that influence financial stability and economic growth," he said.
"But given our current state of knowledge, I find it difficult to envision central banks successfully targeting asset prices any time soon."
He said he would not rule out the possibility that better knowledge of how asset prices behave could in the future affect the conduct of monetary policy.
Home prices have surged by double-digit percentages in some U.S. regions, especially along the coasts. Nationwide, average prices are up 50.5 percent over the past five years.
And despite the pain it will cause many Americans, Greenspan implied the slowing in home price gains could yield some benefits for the broader economy.
"The surprisingly high correlation between increases in home equity extraction and the current account deficit suggests that an end to the housing boom could induce a significant rise in the personal savings rate, a decline in imports and a corresponding improvement in the current account deficit," the Fed chief said.
Greenspan said the degree to which these changes are "wrenching" depends on whether the United States and its key trading partners maintain flexible economic policies that allow needed trade and other adjustments.
The large gap in the U.S. current account, the broadest measure of trade since it includes investment flows, has many in Congress worried.
The Fed chief has long warned that trade protectionism, including tariffs and other barriers to the global flow of goods, are a threat to world economic stability.
In what could be seen as a parting shot at those who maintain the U.S. central bank should adopt specific and openly stated targets for inflation — similar to those at many of the world's major central banks — Greenspan reiterated his steadfast opposition.
"I remain unpersuaded that explicit numerical inflation targets are a key characteristic that distinguishes behavior among the world's central banks," he said, adding that the Fed, and most others, already pursue price stability as a goal.
"That said, I am certain this will remain a topic of lively discussion here and at other monetary forums in years to come," said Greenspan.
While the White House has not yet chosen a successor to the 79-year-old Fed chief, at least one of those cited as a potential heir — former Fed board governor and current Bush administration economic adviser Ben Bernanke — is a staunch proponent of inflation targets.