Feb. 5 (Bloomberg) -- Federal Reserve Governor Elizabeth Duke said she’s upbeat about the outlook for the U.S. economy in part because of a rebound in housing, even after growth stalled during the fourth quarter.
“I’m actually on the optimistic side,” Duke said today in response to audience questions during a speech in Duluth, Georgia. “If you look at the underlying thesis, the growth in consumer spending and some of the business growth, I think there is some momentum building, particularly in the area of housing.”
Duke backed the Federal Open Market Committee decision last week to continue purchasing securities at the rate of $85 billion a month. The Fed said economic growth “paused in recent months, in large part because of weather-related disruptions and other transitory factors,” while “the housing sector has shown further improvement.”
The FOMC announced its decision on Jan. 30, the same day the Commerce Department said gross domestic product shrank at an annual rate of 0.1 percent during the fourth quarter as a plunge in defense spending swamped gains for consumers and businesses. Fed policy makers expect growth of 2.3 percent to 3 percent this year, according to their forecasts in December.
The housing rebound will help ensure the lapse in growth proves to be temporary, Duke, a former community banker, said today.
“We are seeing steady increases in house prices,” she said. “We are seeing improvements in new residential construction and also in household formation, which is the demand for houses.”
“The question really is how much of that momentum in housing, which I expect to continue, will spill over into better consumer confidence, better business confidence,” she said.
Policy makers have pushed the benchmark interest rate close to zero and expanded Fed assets to more than $3 trillion to spur the expansion and reduce unemployment. The moves have helped reduce mortgage rates to record lows, boosting demand for homes.
Housing has helped lead the economy out of every recession since 1950 except for the last one in 2007 to 2009, according to data compiled by Bloomberg.
Homebuilding climbed 12 percent in 2012, the first annual increase since 2005. The S&P/Case-Shiller index of property values in 20 U.S. cities increased 5.5 percent in the year through November, the biggest gain since August 2006, according to data released on Jan. 29.
As the expansion gains strength, community banks are poised to benefit from stronger loan demand and an eventual rise in interest rates, Duke said in her speech.
Reduced interest income and weak loan demand are “consequences of a sluggish economy,” Duke said. “As the economic recovery gains momentum, however, both of these conditions should reverse and give bankers the opportunity to deploy the liquidity and capital they have amassed to the benefit of their shareholders and their local economies.”
Duke, 60, was a director at the Richmond Fed from 1998 to 2000. She was appointed a Fed governor by President George W. Bush and took office in August 2008.
Before joining the Fed board, Duke was senior executive vice president and chief operating officer at, Portsmouth, Virginia-based TowneBank. She also served as the first female chairman of the American Bankers Association.
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