A Fed official was speaking today. "'The outlook for real activity faces a number of significant risks, including the possibility that house prices and construction could retrench sharply and that energy prices could rise significantly further,' Federal Reserve Vice Chairman Roger Ferguson said on Friday."

"'The incoming data suggest that the housing market has begun to cool somewhat, but they do not point to a sharper falloff,' Ferguson said. 'Of course, house prices may become an area of vulnerability," by reducing the growth of household wealth, leading consumers to cut back on spending.'"

"'House prices have increased at a remarkable rate during the past several years, and for some fundamentally sound reasons, including low mortgage rates. However, the possibility remains that the recent run-up in prices may be greater than can be justified by the fundamentals and that increases in house prices may moderate or undergo a sharper adjustment. The latest data on house prices, including the figures released this week, provide a hint that a moderation in house prices, and nothing more serious, may now be under way.'"

"'Another possible avenue for gauging the effects of housing prices on the economy is to look at experiences in other countries..Australia has experienced a decline in real house prices over the past year. One difficulty in interpreting the foreign evidence is that gauging the direction of causality is difficult, that is, are adjustments in house prices causing a slowdown in real economic growth or is a slowdown in activity causing the adjustment in house prices.'"

"On this point, a recent Federal Reserve study of international experience documented the pro-cyclicality of real house prices: House prices have tended to reach a maximum near business cycle peaks, with real GDP growth slowing during the first year or so after house prices peak.'"

"'Given the limits of what we know about the future path of housing prices and about the implications of any particular house-price scenario for real activity, the Federal Reserve will have to continue monitoring this area closely.'"