Fed Minutes: Expansion Slows as Stimulus Fades. Expect Persistant Weakness in Housing Market

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The Federal Reserve Board and the Federal Open Market Committee have released the minutes of the Committee meeting held on June 22nd and 23rd.

Here are a few comments from the minutes that tie the BIG PICTURE perspective to the housing market...

"On net, the upswing in the volume of real estate transactions in recent months was likely to boost the brokers’ commissions component of residential investment in the second quarter. However, starts of new single-family homes, which had trended higher in the first four months of the year, declined sharply in May. In addition, the number of permits for new homes, which tends to lead starts, fell for a second month in May. House prices declined somewhat in recent months, reversing some of the modest increases that occurred in the spring and summer of 2009"

"Although readings from the housing sector had been strong through mid-spring, participants noted that the strength likely reflected the effects of the temporary tax credits for homebuyers. Indeed, data for the
most recent month suggested that, with the expiration of those provisions, home sales and starts had stepped down noticeably and could remain weak in the near term; with lower demand and a continuing supply of
foreclosed houses coming to market, participants judged that house prices were likely to remain flat or decline somewhat further in the near term."

"Overall, participants continued to expect the pace of the economic recovery to be held back by a number of factors, including household and business uncertainty, persistent weakness in real estate markets, only gradual improvement in labor market conditions, waning fiscal stimulus, and slow easing of credit conditions in the banking sector."

"Participants generally anticipated that, in light of the severity of the economic downturn, it would take some  time for the economy to converge fully to its longer run path as characterized by sustainable rates of output
growth, unemployment, and inflation consistent with participants’ interpretation of the Federal Reserve’s dual objectives; most expected the convergence process to take no more than five to six years."

Below is a summary provided by Reuters..

  • FOMC MEMBERS FELT FED SHOULD CONSIDER WHETHER FURTHER EASING IS NECESSARY IF THE OUTLOOK SHOULD WORSEN CONSIDERABLY
  • SOFTENING OF OUTLOOK NOT SEEN WARRANTING POLICY ACCOMMODATION AT JUNE 22-23 MEETING BEYOND THAT ALREADY IN PLACE
  • EXPANSION SEEN LIKELY STRONG ENOUGH TO LOWER UNEMPLOYMENT, ALBEIT MORE SLOWLY THAN EXPECTED
  • INFLATION LIKELY TO STABILIZE NEAR RECENT LOW READINGS, GRADUALLY RISE TO MORE DESIRABLE LEVELS
  • AS A RESULT OF FINANCIAL STRAINS, MOST PARTICIPANTS REVISED GROWTH OUTLOOK DOWNWARD
  • ABOUT HALF OF PARTICIPANTS SAW BALANCE OF RISKS TO GROWTH HAVING MOVED TO DOWNSIDE; MOST SEE RISKS TO INFLATION BALANCED
  • SOME PARTICIPANTS SAW INFLATION RISKS TILTED TO DOWNSIDE IN NEAR TERM; A FEW CITED SOME RISK OF DEFLATION
  • MOST PARTICIPANTS THOUGHT APPROPRIATE TO DEFER ASSET SALES FOR SOME TIME, WITH SEVERAL NOTING WEAKENING IN OUTLOOK
  • SAYS DISCUSSED HALTING REINVESTMENT OF MATURING TREASURIES, REINVESTMENT IN SHORTER-DATED TREASURIES AS WAYS TO SHRINK BALANCE SHEET, NO CHANGES MADE
  • PARTICIPANTS AGREED THAT COUPON SWAPS A GOOD WAY TO SETTLE OUTSTANDING TRANSACTIONS WHEN FAILS OCCUR
  • SAW "FAILS TO DELIVER" IN MORTGAGE BACKED SECURITIES MARKET HAD REACHED VERY HIGH LEVELS IN RECENT MONTHS. READ MORE ABOUT FAILED MBS TRADES

Plain and Simple: Stimulus is wearing off and the economy is trying to gain recovery traction on its own (with the help of a 0.00-0.25% Fed Funds Rate). While the macroeconomic recuperation will be a long, bumpy process with many ups and downs, the FOMC feels they have done enough to grant the system an opportunity to build momentum on its own. In the meantime, if a lack of confidence leads economic output lower and double dip concerns grow,  the Fed remains at the ready to prop the markets and deter contagion.