Comerica Economic Weekly

Two themes emerged from this week’s U.S. economic events:

  1. Residential real estate conditions continue to improve.
  2. The Federal Reserve is getting close to the beginning of  the end of QE3.

New home sales for April increased by 2.3 percent to hit a 454,000 unit sales rate. The months’ supply of new homes remained tight at 4.1 months’ worth; many local markets are tighter. Existing home sales for April increased slightly by 0.6 percent to hit a 4.97 million unit sales rate, the highest sales rate since October 2009. The months’ supply of existing homes has in-creased to 5.2 months, up from a low of 4.3 last January. There are forces at work in the existing home market beyond traditional buyers. Sales of foreclosed homes are falling, but remain elevated. Also single-family aggregators are active in large markets. According to the National Association of Realtors, the median sales price of an existing home is up 11.0 percent in April from a year earlier.

Initial claims for unemployment insurance fell by 20,000 for the week ending May 18 to hit a level of 340,000. This is consistent with a guestimate of about 175,000 net new jobs for May and an employment rate that is unchanged at 7.5 percent.

FOMC officials are increasingly anticipating the turn in monetary policy. In his regularly scheduled testimony before the Joint Economic Committee, Federal Reserve Chairman Bernanke discussed the “calibration” of the Fed’s current program of asset purchases, known as QE3. The Fed wants maximum flexibility to adjust QE, up and down, once the taper begins.

The taper could be launched as early as the June 18-19 meeting, or the FOMC could wait until later this fall. With the expectation that Chairman Bernanke will step down this coming January, it appear likely that the Fed will begin experimenting with tapering down QE3 well in advance of the change in leadership, as long as the economic data cooperates.
The minutes of the April 30/May 1 FOMC meeting showed that the FOMC is undertaking a review of their exit strategy principles as defined in their June 2011 meeting. At the June 2011 meeting the Fed out-lined a three-part strategy, First, asset purchases would end. Second, the fed funds rate would be raised. Third, agency securities would be sold. The Fed wants to have more flexibility in their exit strategy. Particulars were not discussed in the minutes, but it appears that the FOMC wants flexibility in terms of eventual sales of the agency bonds that it now holds. We could see revised for-ward guidance about the exit strategy soon.

For a PDF version of this Comerica Economic Weekly with tables and charts, click here CMAEconWeekly052413 .

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