Fed expected to continue tapering

1/28/2014 11:59:54 AM

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After two days of meeting in December, Federal Reserve officials decided they would begin to reduce stimulus spending by $10 billion, bringing the monthly total to $75 billion on U.S. Treasuries. Since 2012, the Fed has helped keep interest rates near record lows as a result of its fiscal policy. This has encouraged more Americans to borrow and become homeowners, bringing life back into the housing market.

The November national employment report by the Department of Labor revealed that unemployment appeared to be dwindling, as 204,000 jobs were added to the economy during that month. However, the trend was short-lived. The December report revealed weaker results, with only 74,000 jobs added in the last month of the year. 

Fed officials have previously stated that the economy must appear to be strong enough that it can continue growing without stimulus help - meeting an unemployment rate of 6.5 percent with at least 200,000 jobs added to the economy every month. The disappointing December report has left some economists wondering whether the central bank would adjust its recent decision to limit stimulus spending.

In a CNBC survey, most economists predict that the Fed will make good on its decision to reduce spending by $10 billion in January, regardless of the weak December jobs report. Fed officials are meeting at the end of January to discuss the bank's fiscal policy.

Housing market recovery
Other important indicators may prove that the economy has recovered enough to continue growing without help, including the improvements seen in the housing market. According to a recent report by the S&P/Case-Shiller Index, home prices across a 20-city index were up 13.7 percent in November 2013 compared to the previous year.

While prices were up in a year-over-year comparison, the index slipped 0.1 percent from October 2013. It is typical for the housing market to slow down at the end of the year, as more buyers are house hunting during the spring and summer. The growth in prices may be helpful to homeowners who lost equity during the recession, and could bring out more sellers to meet the large housing demand in 2014.

"Home prices continue to rise despite last May's jump in mortgage interest rates," the report cited. "Mortgage applications for purchase were up in recent weeks confirming home builders' optimism shown by the NAHB survey. Combined with low inflation - 1.5% in 2013 - home owners are enjoying real appreciation and rising equity values. While housing will make further contributions to the economy in 2014, the pace of price gains is likely to slow during the year."

While mortgage rates have risen about 1 percent from a year ago, most housing markets are still affordable for American homebuyers. With greater equity and higher prices, the Federal Reserve may decide that the housing market has recovered enough to improve on its own in 2014.

Contact the Federal Savings Bank, a veteran owned bank, to find out more about affordable housing options.