Interest Rates Stable, but "Sub-par" Growth May Bring Change Later
The Commerce Department has now reported that annualized growth of real gross domestic product (GDP) was only 2.2% in the final quarter of last year, down from the “advance” estimate of 3.5%. This means that the economy turned in a sub-par performance during the final three quarters of last year, largely due to a dramatic contraction in the housing production component of GDP (residential fixed investment) and weakness in closely associated components of the economy. The domestic auto sector also was fundamentally weak during 2006. NAHB’s forecast shows another sub-par rate of GDP growth in the first quarter of 2007, followed by a strengthening process over the balance of this year and into 2008. A near-term end to the pronounced contraction in residential fixed investment is central to this forecast pattern.
The Federal Reserve held monetary policy steady at both the January and March meetings of the Federal Open Market Committee (FOMC). Indeed, the Fed has held its target for the federal funds rate at 5.25% since mid-2006, a level that’s around a “neutral” monetary policy stance in the prevailing inflation environment. NAHB expects the Fed to maintain this funds rate target until the late-June FOMC meeting. At that time, NAHB still anticipates a quarter-point rate cut—in order to keep the “real" funds rate from rising as core inflation recedes.
Meanwhile, long-term interest rates firmed up to some degree in late January and early February as incoming data on the economy were surprisingly strong, but long rates have receded more recently. The 10-year Treasury is hanging around 4.70%, roughly the same as in March, and more than a quarter percentage point below mid-2006 levels. The Treasury yield curve still is inverted across much of its range, a pattern that may not be sustainable for much longer. NAHB’s forecast shows an essentially flat Treasury yield curve by late this year, at least out to the 10-year mark, as short rates recede a bit and long rates move up modestly from current levels. In this regard, NAHB is not forecasting the 30-year Treasury rate to move above 5.0% in 2007.
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