Market Conditions Supportive of Economic Growth — According to the FOMC

Growth of real GDP surged in the final quarter of 2009 to an annualized rate of 5.7%, according to the "advance" report released by the Commerce Department on January 29. This compares with 2.2% in the third quarter. A major slowdown in inventory liquidation contributed 3.4 percentage points to the GDP growth rate, compared to a 2.2% contribution to growth from final sales to domestic and foreign purchasers, raising questions about the underlying strength and sustainability of the recovery. The stimulus provisions of the American Recovery and Reinvestment Act should boost GDP growth by about a percentage point in 2010, but exert a modest drag on growth in 2011. A recent shift in the political landscape should put ambitious health care reform plans on hold and limit the size of any additional fiscal stimulus this year. Something on the order of a recent Senate bill (around $80 billion) seems most likely.

Meanwhile, the Federal Reserve  held monetary policy steady at the January 26-27 Federal Open Market Committee (FOMC) meeting, keeping the federal funds rate target at 0.0-0.25%. The FOMC once again committed to "exceptionally low rates for an extended periodm" although the first cracks in unity among FOMC members appeared with the dissent of Kansas City Fed president, Thomas M. Hoenig. Hoenig stated that the current low level for the fed funds rate would no longer be needed for an extended period. This may prove to be the start of a long, slow process preparing for the day when the FOMC raises its fed funds target. NAHB continues to believe that economic conditions will compel the Fed to maintain the rock-bottom funds rate until the early part of 2011. However, the Fed will allow the special liquidity facilities to expire and  shut down the securities purchase programs, as previously announced.

The January 27 FOMC statement noted that the functioning of financial markets has improved and that conditions now are "supportive of economic growth."  However, at the same time the FOMC noted that "bank lending continues to contract." Tight credit conditions are most obvious in  markets where consumers and small businesses (including multifamily builders) raise funds. In other Fed news, the January 28 confirmation of Ben Bernanke for another 4-year term as Fed Chairman was well-received by financial markets. [ return to top ]