Is the Fed getting worried about a housing centric economy?

Greg Ip has a lengthy article in the Wall Street Journal that, on one hand, offers the Federal Reserve’s defense of its post-stock market bubble economic management and, on the other hand, seems to suggest that the Fed is also a bit worried about the world it has helped to create. More evidence of worry: Caroline Baum notes that the Fed now seems a bit more open to regulatory steps to curb localized housing froth than it was to regulatory steps to try to slow the .com/ .bomb bubble.

My favorite data points:

Jobs in manufacturing: down 2.8 million since the beginning of 2001.

Jobs in real estate, residential construction, and banking: up 0.8 million.

The increase in real estate jobs seems a bit low to me, given how the real estate market has replaced the stock market as the fastest road to great wealth in the minds of most Americans.

The Fed is not solely responsible for the changing composition of the US economy. Lower interest rates normally work in part by driving the dollar down, stimulating exports. But that channel, as Ip also notes, was blocked. I don’t think it was blocked just because "foreign economies were in even worse shape than the US." China’s economy was not exactly in bad shape in 2002 -- and it was booming in 2003 and 2004. But a booming China did not allow its exchange rate to rise, as we all know -- and instead it has intervened like mad to support the dollar, and in the process also supported the bond market. That in turn augmented the impact of the Fed’s stimulus on the residential housing market. Professor DeLong argues that hedge funds -- and types of other financial innovation -- may have played a role here too.

The problem: China did not let its exchange rate to adjust when it was booming, and now faces rising pressure to let its exchange rate adjust even as some recent signs suggest that China’s economy is cooling off. Or at least the "domestic" component of China’s economy is cooling. Too much investment in cement production -- and perhaps real estate as well. Yet a slowdown in investment is not being offset by rising consumption, but rather by exports. If --as another Wall Street Journal article suggests -- China increasingly is manufacturing the components that go into a PC, not just doing the final assembly, its trade surplus is set to expand even further. China is importing less (meaning the pace of import growth has slowed significantly, and the growth rate is likely to fall further), while its amazing export growth continues.

Watch out: an imbalanced world economy looks set to get even more imbalanced.