The economy grew at a moderate pace in the first quarter with real gross domestic product expanding at a 2.5% annual rate, as some of the temporary drags that held growth to a 0.4% pace the prior quarter faded, according to a report submitted to the Treasury.

However, the housing market continues to experience a vigorous recovery, said Matthew Zames, an adviser to the Treasury, who filed the update.

Residential investment increased at a 12.6% annual rate last quarter, and the latest building permits data point to continued strong activity growth in the second quarter. 

Additionally, home prices continue to move higher in almost all major metropolitan areas.

With inflation running below the Federal Reserve’s 2% inflation goal, and unemployment above levels consistent with full employment, the central bank has continued to provide monetary accommodation.

"Expectations for tapering off of the Fed’s outcome-based purchases have been pushed back due to recent softening in the economic data. Market participants generally anticipate little change to Fed policy in coming months," Zames explained.

Additionally, the Treasury Committee addressed the potential impact on the Fed’s exit strategy on Treasury financing. 

Should the Fed embark on policy tightening, yields could overshoot to the high side due to concerns of the central bank portfolio unwinding and fixed-income investor redemptions.

"Should this occur, the higher cost of financing is material as annual interest expense could more than quadruple when yields 'normalize.' Therefore, continuing to extend the weighted average maturity of Treasury debt in a stable manner so as to minimize term premium is sensible policy to adhere to," Zames said.