June 18, 2013 | By Scott Minerd
There is a greater-than-50 percent chance that the Federal Reserve will maintain the size and projected tenor of quantitative easing (QE) through the remainder of 2013. Policymakers have also indicated that the asset purchase program could be expanded if warranted by less-than-satisfactory economic performance.
Interest rates rose 59 basis points between May 1 and June 12 – equal to more than one third of the 10-year note’s yield at the start of that period. Mortgage applications fell sharply over the past month, in response, and a contraction in housing activity is likely if interest rates continue to rise. The Federal Reserve will do what is necessary to protect the contribution to GDP that is coming from new construction and the wealth effect from home price appreciation. A reduction in economic output due to a flattening in the vitally important housing sector will likely lead to lower interest rates. That could cause the signals coming out of the Fed to shift away from tapering, and possibly back toward increasing or extending QE.
The housing market recovery continues to provide substantial support to U.S. economic growth. Housing-related activities, defined as private residential investment, personal expenditures on household durable goods and utilities, and the wealth-effect on consumption from home price appreciation, have positively contributed to real GDP growth for five consecutive quarters. Housing-related activities contributed more than half of the real GDP growth in the first quarter of 2013.
Source: Haver Analytics, Guggenheim Investments’ estimates. Data as of 1Q2013. *Note: For simplicity, we don’t consider the impact of the housing boom on job creation, which could potentially add additional growth to the housing-related activities.
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