By David F. Seiders. Over the years, the Federal Reserve has often been a villain in the eyes of the housing industry. Our most recent case of Fed-induced heartburn occurred back in 2000, when Chairman Greenspan and his troops hiked short-term rates in an effort to weaken the housing sector and slow down an economy that was threatening to generate serious inflationary pressures.
But the Fed has been a friend of housing since the beginning of last year, when the central bank kicked off a dramatic process of monetary easing that brought down short-term interest rates by nearly 5 percentage points. That policy process clearly helped to support housing and bring the recession of 2001 to an end.
The Fed has been in a holding pattern so far this year, maintaining the lowest short-term rates in over four decades in order to support the budding economic recovery. It's clear that the Fed will start raising short-term rates at some point, since the current monetary policy stance eventually would overheat the economy and bring back inflation. The real question is when?
The statement issued at the close of the Fed's most recent policy meeting on June 26 tells us something about the Fed's plans for the immediate future. The public statement said that the target for short-term rates was unchanged and that the risks of economic weakness and inflation remained about in balance. That kind of statement suggests that something important in the economic environment would have to change quite a bit in order to encourage a rate change at the Fed's next official policy meeting on August 13. It's highly likely that the economic recovery still will be struggling during the summer months, and it's also likely that inflation will remain quite low during this period; thus, a rate hike by the Fed in August is almost out of the question.
Looking down the line, it's reasonable to expect the Federal Reserve to stand fast until the economic recovery process shows that it can sustain itself without strong ongoing support from monetary policy. Statements by Greenspan suggest that the Fed will wait until corporate profits and the stock market are on a decisive upward trend, until business spending on capital equipment definitely is on the rise, and until the job market is generating enough employment growth to put the unemployment rate on a downward path. These developments are not likely to be clear before the fall, partly because of lags in data availability, and thus Fed rate hikes at or before its September 24 meeting carry a low probability.
The NAHB's working assumption is that the Fed will implement its first quarter-point rate hike at its policy meeting on November 6; incidentally, that's the day after the November elections. Beyond that point, the Fed will most likely continue to raise short-term rates in small steps until monetary policy gets back into a neutral zone, i.e., where policy neither stimulates nor impedes economic growth. That won't occur until the Fed has raised rates by about 3 percentage points and, until that time, the Fed should be viewed as easing up on the policy accelerator rather than as hitting the brakes. From this point of view, the Fed figures to remain a friend to the interest-sensitive housing sector for at least another year.