This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.
The most important message from Chairman Bernanke’s testimony is that the federal funds rate will be held at 0%-0.25% for an extended period. In light of the higher discount rate (0.75% vs. 0.50%) announced on February 18, 2010, market participants obtained confirmation from the Chairman that the change in the discount rate was a removal of emergency accommodation put in place to address the financial crisis and not a sign of tightening of the monetary policy stance.
Overall, Bernanke presented evidence to support the case of an unchanged federal funds rate for an extended period and indicated that inflation will be subdued. In the Chairman’s opinion, “the job market remains weak” as implied by the high unemployment rate and other related labor market indicators. Bernanke cited that 40% of the unemployed have been out of work for six months or more in January 2010, which is a sharp increase from a 22.4% reading a year ago (see chart 1). Conditions of the labor market will play a major role in the likely path of monetary policy in the months ahead.
Contraction of bank lending featured in the testimony, no surprise here. As chart 2 indicates, the credit machine is not functioning and for self-sustained economic growth, a meaningful rebound of bank loans is necessary. On the positive side, Bernanke noted that conditions in the short-term markets have returned to the pre-August 2007 levels.
Sales of New Homes Post New Record Low
Sales of new single-family homes fell 11.2% in January to a record low of 309,000. Sales of new single-family homes declined in Northeast (-35.1%), South (-9.5%) and West (-11.9%) but rose in the Midwest (+2.1%).
Inventories of unsold homes rose to a 9.1-month supply (see chart 4), while the median duration to sell a new single-family home rose to 14.2 months (see chart 5). The median price of a new single-family home fell 2.4% from a year ago to $203,500. On a year-to-year basis, the median price of a new home has dropped each month from December 2007, with one exception in October 2009. These are significantly dire numbers which have failed to show an improvement despite the first-time home buyer tax credit of $8000. The existing homes market has reaped the benefits of the tax credit program.
Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 24, 2010.
* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.
