FOMC Policy Statement

Status Quo is Also Noteworthy

The federal funds rate was left unchanged at 0%-0.25% as expected; it has held at this level since December 2008. The Fed's plan to purchase $600 billion of Treasury securities has also been left in place along with the existing arrangement of reinvesting principal payments from its holdings of securities. The vote was unanimous although four members of the voting panel were replaced for 2011. Charles Plosser of the Federal Reserve Bank of Philadelphia, Richard Fisher of the Dallas Fed, Charles Evans of the Chicago Fed and Narayana Kocherlakota of the Minneapolis Fed are the replacements. Of these four voting members, Fisher and Plosser have been critics about the second round of quantitative easing that is currently underway. They have held the opinion that the current stance of monetary accommodation carries with it inflationary consequences that would be damaging to the economy. However, unlike President Hoenig of the Kansas Fed who shared this opinion and dissented at each meeting in 2010, these two members voted along with majority in today's meeting.

The FOMC's evaluation of the economic conditions did not show major departures from its assessment in December. The marginal modifications are consistent with the nature of incoming economic reports. The bird's eye view of the economy is unchanged from the December meeting, with the Fed noting again that the "economic recovery is continuing." The Fed now sees household spending to have "picked up late last year" compared with the December view that household spending was "increasing at a moderate pace." The Fed reiterated that "the unemployment rate is elevated and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate." The Fed's depiction of the housing sector was not altered from the December statement which read as: "The housing sector continues to be depressed."

The Fed's opinion about inflation shows a small modification. The Fed continues to note that "measures of underlying inflation have been trending low" and that inflation expectations are stable despite higher commodity prices. The reference to commodity prices is new. In this context, it is important to bear in mind that pass through of higher commodity prices is not visible yet and a synchronization of growth across the world will be necessary for inflationary pressures to become troubling. The global economy is operating on two speeds - slow in the advanced economies and fast in the developing nations. For now, the dual speed world economy is giving the Fed room to focus on economic growth.

Sales of New Homes Rebound from Historical Low

Sales of new single-family homes increased 17.5% to an annual rate of 329,000 in December after holding steady during November. The magnitude of the jump in sales of new homes is impressive but it is important to note that home sales are recovering from a historically low level. Sales of new single family homes stood at an annual rate of 280,000 in November, which is close to the historical low of 274,000 recorded for August 2010. Putting things in perspective, the peak of new home sales was 1.389 million home and it occurred in July 2005. The median sales pace of new single-family homes during 1963-2010 is 655,000 homes; excluding the recent housing market boom, the median sales pace is 645,000 homes for the period 1963-2000. Relative to these measures, sales of new single-family homes in December were roughly 50% of the historical median.

On an annual average basis, sales of single-family homes fell 14.2% in 2010 after 22.5% drop in 2009. Sales of new single-family homes have dropped for five straight years. Sales of new single-family dropped for five consecutive years during the 1980 and 1981-82 recessions but the size of the decline was noticeably smaller (Chart 3).

The number of new homes "for sale" stands at 190,000 (see Chart 4), which is close to the historical low of 184,000 in July 1967. Inventories of unsold homes relative to the pace of home sales during December fell to 6.9-month supply from 8.4-month supply in November (see Chart 5). These numbers are somewhat bullish for future home construction despite the enormous supply of unsold existing homes.


The median price of a new single-family home rose 12.1% to 1,500 in December from the prior month. On an annual average basis, the median price of a new single-family home advanced 2.9% in 2010 vs. declines in both 2008 (-5.5%) and 2009 (-6.9%) and a nearly steady reading in 2007.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions

About the Author

Senior Vice President and Economist