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Michael Woodford, an economics professor at Columbia University, says the Federal Reserve would be wise to track housing prices when making decisions on interest rates because they are a good indicator of private-sector expectations of monetary policy, MarketWatch staffer Greg Robb reports.

In a paper circulated by the National Bureau of Economic Research, Woodford said tracking housing prices would help determine if the Fed’s interest-rate strategy is on course. The central bank should “lean against” housing prices: being tighter when housing prices unexpectedly rise and easier when prices
surprisingly fall.

The question of how monetary policy should react to housing prices and other potential asset bubbles has been much debated since the 1990s. Former Fed Chairman Alan Greenspan had the view that the Fed should be prepared only to clean up after asset bubbles burst because it was difficult to spot them early enough.

Some experts have argued the Fed should have tightened policy faster in the face of the housing market bubble in the early 2000s.

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