Housing Weakness Spurs Fed to Cut Rates; More Cuts Expected in March
Growth of U.S. economic output (real Gross Domestic Product) slowed to a meager 0.6% annual rate in the final quarter of 2007, according to the “advance” estimate released by the Commerce Department on Jan. 30. The weakest parts of the economy in the fourth quarter were sectors affected directly or indirectly by the housing downswing. The labor market also shows serious recent signs of weakness, largely because of job losses in residential construction and related areas (including housing finance). Total payroll employment actually fell slightly in January, as private payrolls were essentially flat while government payrolls declined. The recent weakness of GDP and the labor market, along with systematic decline in the Conference Board’s index of leading economic indicators, have stoked recession worries among financial market participants and policymakers in Washington. On Jan. 22, the Federal Reserve announced "emergency" 75 basis point cuts to both the federal funds rate and the discount rate, just eight days prior to the regularly scheduled Federal Open Market Committee (FOMC) meeting. Indeed, this was the first inter-meeting cut since September 2001 (in the wake of 9/11) and the single largest rate cut in 24 years.

The Jan. 22 FOMC statement noted that appreciable downside risks to growth remained—even after the emergency rate cut. Eight days later, the Fed cut short-term rates by an additional 50 basis points at the regularly scheduled FOMC meeting on Jan. 30, bringing the cumulative reduction in the funds rate so far this year to a whopping 125 basis points. The FOMC statement once again cited considerable stress in financial markets, deepening of the housing contraction and softening in labor markets. The statement also reiterated concern about remaining downside risks to growth, opening the door to further monetary ease down the line. NAHB is currently assuming an additional half-point cut at the March 18 FOMC meeting, followed by another quarter-point cut on April 30. These moves will push the nominal funds rate down to 2.25% and the real (inflation adjusted) funds rate below 1%. The Fed could be even more aggressive if economic and financial market conditions demand even more monetary stimulus in the near term. [ return to top ]