The Trouble with Tapering

Rising interest rates are beginning to put pressure on the recovery in the housing market, which will affect economic output. This reduces the likelihood that the Fed will taper QE in 2013, and could even lead it to signal a possible expansion or extension of the current policies.

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June 18, 2013   |    By Scott Minerd

Global CIO Commentary 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.

 

Measuring the Impact of the Housing Recovery on GDP

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.

CONTRIBUTION TO U.S. REAL GDP GROWTH FROM HOUSING-RELATED ACTIVITIES

CUMULATIVE NYSE ADVANCE/DECLINE LINE AND THE DOW JONES INDUSTRIAL AVERAGE

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.

Economic Data Releases

Disappointing Production Data, but Positive Retail Sales

Eurozone Production and Prices Up

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.


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