Fed to Wind-Down Stimulus in Mid-2010: BBVA Analyst

As the global economy emerges from the recession and shows continued signs of improvement, the Federal Reserve is likely to execute its exit strategy for winding down the period of extraordinarily low interest rates used to stabilize the economy as early as the summer of 2010, according to a BBVA Compass analyst. “In Q409, it is clear that the worst of the recession has passed; the economy expanded in the third quarter, ?nancial conditions are stabilizing, residential investment grew for the ?rst time since 2005, consumer spending is picking up and business inventories are more in line with sales,” BBVA research department’s chief US economist Nathaniel Karp wrote in a fourth quarter outlook report (download here). Industry players surveyed eight weeks ago expected the Fed’s low interest rates to rise as early as February 2010. A survey conducted within the past two weeks showed now rates aren’t expected to rise until June 2010, Karp said in a conference call Monday. Inflation pressures will remain low “in the foreseeable future,” enabling the Fed to keep interest rates low. “Given the slack in the economy, the Fed is expected to gradually wind down the monetary stimulus. The strategy is anticipated to focus ?rst on the withdrawal of quantitative easing and then on raising rates,” Karp wrote. Crucial to the wind-down will be a transparent and gradual process that will include not only increasing rates, but also the wind-down of short-term lending, paying interest on reserves, time deposits for depository institutions, reverse purchase agreements and runoffs and asset sales. In residential real estate, low prices, attractive mortgage rates and the extension of the homebuyers’ tax credit will support demand, which will prompt more construction, Karp wrote, adding that commercial real estate (CRE) will continue to suffer from a lack of available credit. The strains in commercial real estate are larger in office space and “milder” in apartments. Write to Austin Kilgore.

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