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Yesterday, Federal Reserve Bank President Janet Yellen spoke to the Sillicon Valley Leadership Group and said the current slowdown in the U.S. housing sector has the potential to cause recession in the world’s largest economy.

“If there is one development to worry about the potential of recession it will be housing,” said Yellen.

She said, however, that adjustments in the housing sector are taking place and “there has been remarkably little spillover” to the general economy.

For a complete breakdown of the speech, wonder over to Calculated Risk. Excellent read to gain valuable insight as to the connection between the housing market and the overall US economy.

I think it is important that the Fed is focused on the health of the housing industry. With many economists undecided on the direction or health of the economy, open discussion about the facts will help promote stability. The mission of the Fed is to provide a safe, stable, and flexible financial system.

In order to control inflation, the Fed will raise and lower interest rates to slow and speed up the economy as it sees fit. This chart shows the Fed’s effort over the last 2 years to slow the economy.

Actual inflation and the perception of inflation both impact mortgage rates. Inflation erodes the value of fixed-income securities so it is enemy #1 against mortgages.