Positive Growth Indicates Economic Recovery Will Begin Soon
The contraction in economic output (real GDP) slowed considerably in the second quarter, and available data point toward resumption of positive growth in the third quarter of this year. It’s now likely that the official end to the “Great Recession” lies somewhere within the current quarter, although the decision about exact timing won’t be announced for some time.
Systematic recovery of consumer spending is essential to sustainable economic expansion. Recent Federal Reserve data indicate key improvements to household balance sheets in the second quarter, a prerequisite to durable recovery of consumer spending. The Fed held monetary policy steady at the conclusion of the Sept. 22-23 Federal Open Market Committee meeting, maintaining the rock-bottom target for the federal funds rate and reinforcing targets for purchases of housing agency debt and MBS as well as Treasury securities. The Fed most likely will maintain a highly stimulative monetary policy as long as unemployment is high and inflation is low, a condition that’s likely to persist for nearly two years.
Federal Reserve management of the federal funds rate naturally will anchor the short end of the Treasury yield curve, keeping bill rates close to current levels for an extended period. The projected economic expansion, along with persistent concerns about the prospects for federal budget deficits down the line, will put some upward pressure on longer-term interest rates going forward, although containment of both core inflation and private sector inflation expectations will help hold long-term rates down.
Maintenance of capital inflows from abroad is bound to remain a nagging issue, but NAHB does not expect those inflows to falter during the next few years. NAHB expects the Treasury yield curve to shift up and steepen to some degree between now and the end of 2011, with the 90-day bill rate up by about 50 basis points and the 10-year Treasury rate up by roughly a percentage point during that time span. These changes, if achieved, will keep both nominal and real Treasury rates in historically low ranges.
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