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Ask the Economist: The Fed Raising Rates Will Likely Not Immediately Affect Housing

Curt Long was named director of research and chief economist for the National Association of Federal Credit Unions in August 2014. In this role, he serves as the association’s chief economic analyst, conducting economic and financial policy research and providing ongoing economic analysis for NAFCU’s staff and its member credit unions. Long also helps produce a number of NAFCU’s publications – including the quarterly CU Performance Benchmark Report and the monthly Economic & CU Monitor – and its numerous economic forecasts and surveys. In addition, he presents on economic topics at NAFCU events and conferences. Long joined NAFCU in January 2010 as the association’s research assistant. In February 2012, he was promoted to staff economist and in August 2013 he was promoted again to senior economist. 

What can we expect from the December FOMC meeting?

If you look back to their most recent statement in October, it seemed like the FOMC was priming markets for a liftoff in December. With that said, they’re always pretty cautious. They always leave themselves room to backtrack if events do not unfold according to their expectations. But since that time, we’ve had a couple of major economic releases—the GDP as well as the October employment report, and then we have one more major one to go with next month’s employment report. I would say GDP came in pretty much in line with expectations (1.5 percent in the advance Q3 estimate compared to 3.9 percent for Q2) while the employment report was better than expectations (270,000 jobs added in October, 50 percent more than expected). We really only have one more hurdle to go, and unless something unforeseen occurs, I think it’s a pretty good bet that the Fed is going to raise rates in December.

What does the Fed or the economy have to gain from keeping the rates near zero for so long?

I think you can start by asking, “Why did the Fed go to zero interest rates to begin with?” There are really two major reasons for that. One is to broadly support economic growth. Low rates encourage people to spend for big-ticket items they have to borrow for. Auto sales have been a really critical element to the recovery so far and that’s certainly been aided by the low-rate environment that we’ve been in. Housing has been another area. Housing has been a little more uneven than auto sales during this recovery, but with that said, I’m sure there are some people who have purchased housing who would not have done so otherwise if we had not been in the low-rate environment we’ve been in.

The other reason is inflation. The Fed has a dual mandate. On one hand, they’re going to target full employment, and on the other hand, stable price growth. To the latter point, they have a 2 percent target rate for inflation and we have consistently run below that target during the recovery. Raising rates at a time when inflation is running below expectations or running below the target rate would tend to put even more downward pressure on prices. That’s been the main reason the FOMC has provided recently for when the Fed hasn’t raised rates yet.

Will the low advance Q3 estimate for GDP growth be a headwind for housing?

Even though the headline GDP number came in a little bit lower than Q2 (1.5 percent compared to 3.9 percent), I’m not that concerned about it, because the main area of weakness was inventories. That was somewhat to be expected, because inventory growth had been strong in the first half of the year, and those things tend to even out. Inventories are by far the most volatile element in the GDP calculation. When that is the driving force behind the move in GDP, it tends to be downplayed a little bit. Another thing to keep in mind is there always tend to be pretty significant revisions to the advance GDP estimate.

If a liftoff occurs in December, what will the housing industry look like in 2016?

I don’t think you’re going to see too severe of an impact on housing right away. Of course, when the Fed raises rates, it’s going to impact the lower end of the yield curve more immediately than the longer end. I’m not sure you’re going to see an immediate impact on mortgage rates. Going forward, I think overall consumers are in a really good spot. Households deleveraged during the crisis, they’ve got strong balance sheets, consumer confidence is high, we’re starting to see signs of potential wage growth (a 9 cent increase in October’s employment summary), and that’s only going to help. The concern that I have for housing is that supply is pretty tight right now, and I still think credit is fairly tight, especially for everyone but the highest quality applicants.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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