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Fed to Find Relief in Strong Sales of New Homes

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It has been a quiet morning in the foreign exchange market with the U.S. dollar consolidating ahead of the Federal Reserve's first monetary policy meeting in 2011. The stronger than expected new home sales report will give the Fed the confidence to upgrade their assessment of the economy as there have been broad based improvements in economic data since the last monetary meeting. New home sales rose 17.5 percent, the strongest pace in 19 years. The number of units sold rose to 329k from 280k but the most encouraging aspect of the report was the fact that prices of new homes increased in December. After having been frozen for most of last year, the U.S. housing market could finally be warming up. Whether or not this becomes a new trend remains to be seen but for the Fed, this is one more positive input.

4 New FOMC Voters - Look for Any Dissent

Four new members will be joining the Federal Open Market Committee and it will be their first opportunity to officially show the world where they stand on monetary policy. Three out of the four new members are considered hawks who usually err on the side of tighter monetary policy and one wholeheartedly agrees with Bernanke that monetary policy needs to kept easy to avoid deflation. Overall the committee is a little more hawkish than last year and if there is any dissent in favor of tighter monetary policy, it would be very bullish for the U.S. dollar. Last year, Hoenig was the lone dissenter but he will not voting this year and it will be interesting to see if anyone inherits his role. If no one dissents, then it could be interpreted as more dovish and dollar bearish because eight times last year, Hoenig voted against the policy. However we do not expect this to be the case, but the central bank could upgrade its assessment of the economy and growth which may be enough to lend support to the U.S. dollar.

A Hint of Optimism from the Fed?

Since the last monetary policy meeting in December, there have been reasonable improvements in the U.S. economy. The most significant was the decline in the unemployment rate which fell from 9.8 to 9.4 percent. Although this did not coincide with a meaningful rise in non-farm payrolls, the Fed may have to alter the language used to describe the jobless rate in the FOMC statement as it currently states that the rate of recovery "has been insufficient to bring down unemployment." One possible change would be say that it has not brought the rate of unemployment down significantly because it has declined since then. The following table compares the most recent U.S. economic reports with the ones the Fed had on hand at the December meeting. As you can see, manufacturing and service sector activity accelerated while the financial markets stabilized. Inflation was mixed, but consumer prices, which matters more than producer prices increased in December. In terms of consumer spending, retail sales less autos also increased slightly, to the relief of the Federal Reserve.

Overall we expect a hint of optimism from the Fed but they will stop short of suggesting that the QE program could be reduced. The central bank needs to decide by the spring whether asset purchases will be extended beyond June but they can afford to wait a few more months before making the decision.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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