The latest round of economic data sends out mixed signal about the US economy. The Philly Fed’s General Economic Index fell to minus 12.5 in February, the lowest since June, from minus 5.8 in January. Does this mean the nation’s economic concerns are more regional than national?
Not exactly, says Mark Zandi, chief economist at Moody’s Analytics Inc. The concerns are across the board although the Filly Fed Index has been unusually volatile, up and down and all around in recent months. Since last year this time, the index has been on the soft side, suggesting manufacturing, particularly in the middle line equation, has been a bit weak. But the concerns are there across the country, they are not just in the Philadelphia district or in California, but they are coast-to-coast, he observed.
The minutes from the Federal Reserve’s latest policy meeting seem to indicate the central bank is considering how to bring an end to assets purchases, the “quantitative easing.” The markets turned lower on that news on Thursday.
Asked what that selling pressure means for financial markets that were hoping to ride the wave of quantitative easing to all time highs this year, Mark said QE has been very important for the stock market and the bond markets and the expectation had been that the Fed would continue with the quantitative easing policy at least through the end of the year and probably into next.
Investors have been scaling back that expectation now for the last couple of months, and of course with the Fed’s minutes, the discussion sounded as if there were a number of members thinking the QE should end even sooner than that, that the scaling back should begin sometime this summer or fall, he noted. The markets are beginning to reevaluate their expectations about QE and that probably explains the slump in the indexes, he added.
Asked if there were any surprises from the recent FOMC minutes, Mark said they were a little-bit more hawkish than he had anticipated. The Fed members seem to be more willing to wind down the bond purchase program more quickly than he had thought, though from the minutes it appears that there is a lot of disagreement (on the subject) and it could be the case the chairman, the vice-chair and other committee members, who have a little bit more say in the matter, are a little more dovish and would like to hold on QE for a little bit longer. That probably confirms his expectation that QE will be in place through the remainder of the year, he noted.
St Louise Fed President James Bullard thinks unemployment rate may drop to 6.5 percent by the middle of next year and may prop the central bank to raise interest rates from near-zero.
Asked to comment on Bullard’s thoughts, Mark said that’s pretty optimistic. The central forecasts of the members of the Federal Reserve had put 6.5 percent unemployment rate by mid-2015; so it looks like Bullard is a year ahead of the average of the committee, and that’s about as optimistic a forecast that he has seen, he added. His optimistic expectations were that unemployment rate won’t get below 6.5 percent until late-2014, early 2015, but it seems president Bullard is more optimistic than he is, Mark quipped.
The National Association of Realtors reported sales of previously-owned homes increased in January and median price of an existing home increased 12.3 percent to $173,600 last month from January of 2012. Asked if this demand signals sustained momentum for this year, Mark said he thinks housing turned around in 2012, and the momentum will be sustained in 2013.
By 2014-15, the housing market should be up and running, he added, saying he hopes the housing industry continues to gain traction though he knows a lot of the sales in the past one year were sales to investors. However, by this time next year, regular and normal home-purchases by traditional home owners should pick up, he concluded.
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