New York Fed: Expect a Boost in Household Formation in 2016

unboxing-houseSpeaking on the country’s economic outlook and monetary policy at the Economic Leadership Forum in Somerset, New Jersey, Federal Reserve Bank of New York President Bill Dudley said the U.S. economy has its strengths and weaknesses—but he expects household formation to receive a boost in 2016.

“Housing starts are still well below the rate consistent with the nation’s population growth rate, and the fundamentals of housing demand remain positive,” Dudley said. “Rising employment is likely to boost the household formation rate and low mortgage interest rates should keep housing relatively affordable, despite the ongoing recovery in home prices.”

Dudley pointed to the moderate expansion of consumption and housing activity as strengths for the economy, while pointing to weak GDP growth in the fourth quarter as a negative—though the weak Q4 GDP growth should be weighed against the evident strength of the labor market, he said.

“I continue to expect that the economy will expand at a pace slightly above its long-term trend in 2016,” Dudley said. “In other words, I anticipate sufficient economic strength to push the unemployment rate down a bit further and to more fully utilize the nation’s labor resources.”

Inflation remains well below the Fed’s 2 percent objective, primarily due to weaker energy prices and a stronger dollar’s impact on non-energy import prices, according to Dudley—and the inflation outlook has “not changed much.” The passage of the FY 2016 budget package should provide a boost to economic activity, he said.

“Not only does this budget package reduce uncertainty about the budgetary outlook, but its extension of a number of tax breaks and easing of the caps on domestic and military spending means that fiscal policy in 2016 will likely turn somewhat stimulative,” Dudley said.

On whether or not there will be more increases to the federal funds target rate following December’s long-awaited rate hike, Dudley stated that there are “no surprises here—it depends on the data.” He reiterated what the FOMC statement said in December that normalization of monetary policy will be gradual—but he stressed there is no commitment to raise the rates.

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