Forecast: Another Interest Rate Hike Likely In March
Growth of real Gross Domestic Product (GDP) slowed even more than expected in the final quarter of 2005, slipping to an annual rate of only 1.1% (according to the “advance” estimate released on January 27). This was the lowest growth rate in three years, and raised questions about the sustainability of the economic expansion. The composition of the fourth-quarter slowdown, however, along with some advance indicators, point toward a nice rebound of GDP growth in the first quarter of this year. Although the quarterly patterns have changed quite a bit, NAHB still is forecasting above-trend GDP growth for 2006 (3.6% on a fourth-quarter to fourth-quarter basis), slowing to a trend-like performance (3.25%) in 2007. As expected, the Fed enacted another quarter-point increase in short-term interest rates at the January 31 meeting of the Federal Open Market Committee (FOMC), raising the federal funds rate target to 4.5%. The FOMC statement was less committal than in prior statements, and dropped the word “measured” in describing possible future tightening. These changes give new Fed Chairman Ben Bernanke maximum flexibility to craft future monetary policy — a present from Alan Greenspan, who chaired his last FOMC meeting on January 31.
The FOMC statement not only insisted that the economic expansion remains “solid,” despite recent “uneven” economic data (including fourth-quarter GDP), but also fretted about the inflation potential of tightening resource markets and elevated energy prices. As the result of this rather hawkish tone, along with recent signals from both labor and energy markets, NAHB has added another quarter-point rate hike to its forecast of the funds rate at the next FOMC meeting on March 28. An additional increase is possible at the May 10 FOMC meeting, but NAHB is holding off on making that forecast adjustment pending incoming data. Indeed, the Fed has made it clear that its rate adjustments from here on out will be “data dependent” — rather than being semi-automatic, as policy was moved systematically from highly accommodative toward “neutral” after mid-2004.
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