The Fed’s Humphrey-Hawkins testimony and its implications for REITs (Part 2)

Market Realist

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The Fed’s overall view of the economy

The economic recovery has continued at a moderate pace in recent quarters despite the strong headwinds created by federal fiscal policy. When discussing the fiscal headwinds, Bernanke is referring both to the tax increases at the beginning of the year and also the sequestration spending cuts. It’s the Fed’s view that the fiscal drag will dissipate through the end of the year, setting the stage for faster growth in the second half.

Bernanke mentioned how much housing has contributed to the economic turnaround. House prices are increasing, which is repairing household balance sheets and reducing the number of underwater homeowners. This increases consumer spending and also increases consumer confidence. Second, the rise in home prices is creating jobs in the construction sector, which is reducing unemployment.

The Fed’s forecast for economic growth is that GDP will begin to accelerate in the second half of this year, eventually reaching a pace of 2.9% to 3.6% by the end of 2015. This should be enough to reduce unemployment to between 5.8% and 6.2% by the final quarter of 2015.

The increase in economic growth is due to the belief that the effects of fiscal policy will exert somewhat less drag over time, as the effects of the tax hikes and spending cuts diminish. The FOMC (Federal Open Market Committee) also believes that a number of risks that were prominent last year—specifically Europe, household balance sheets, the fiscal positions of state and local governments, and business balance sheets—have all improved markedly over the past year. It does caution that the economy is vulnerable to external shocks, and particularly that global growth may turn out to be lower than anticipated.

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