Fed’s Easy-Money Policies Finally Spurring Growth

Three years after the Federal Reserve cut interest rates to zero, Chairman Ben Bernanke’s easy-money policies are showing signs of speeding up the economic recovery.

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The housing slump may be nearing a bottom, as record-low mortgage rates are beginning to lure in more buyers, and confidence among homebuilders climbs to its level highest since May 2010, according to the National Association of Realtors.

Banks are putting their money to work in expanding commercial and industrial loans, which last quarter grew the most since Lehman Brothers went bankrupt in September 2008.

“When the Fed sprinkles happy dust on the economy, we always respond,” said Allen Sinai, co-founder and chief global economist and strategist at Decision Economics in New York. “The happy dust has been out there a long, long time, and I think it finally may be settling in some places.”

The economic recovery in the U.S. has been slow as households focused on saving rather than spending, while banks concentrated on rebuilding capital instead of lending. But that may now be changing, said Sinai, who sees growth accelerating in the range of 2.5 percent to 2.75 percent next year, compared to 1.5 percent to 2 percent this year.

However, if Congress fails to extend a payroll tax cut and special unemployment benefits beyond the end of the year, that could knock a percentage point off growth in 2012, says Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

Still, many economists remain optimistic, including Lou Crandall of Wrightson ICAP LLC in Jersey City, who predicts growth next year of just over 3 percent as companies become more confident about the economic outlook and expand their businesses.

Sinai says the resilience of the economy will lift corporate earnings and stock prices. Operating profits of companies in the Standard & Poor’s 500 Index will rise by an average of 8 to 10 percent next year, and the stock gauge will end the year at 1,400, he forecasts, up from 1,241.30 at close on Tuesday.

Hoffman predicts that “next year, stocks will do better than bonds.” He sees stock returns in the “high single digits,” including dividends, while he expects the yield on the benchmark 10-year Treasury note to be below 2 percent.

President Barack Obama said it’s “possible” the U.S. unemployment rate may be down to 8 percent by the November 2012 elections in an interview on CBS television program “60 Minutes” on December 11. Both Sinai and Dean Maki, chief U.S. economist at Barclays Capital in New York, agree with the president’s assessment of the recovery.

“We see the unemployment rate at 8 percent at the end of 2012,” Maki said, compared with a rate of 8.6 percent last month. It will fall faster than many forecasters expect, in part because “more and more of the baby boomers are retiring every month,” he added.

However, just as the payroll-tax debate in Congress is creating a level of economic uncertainty heading into the New Year, so too could debate over former president George W. Bush’s income-tax cuts, which are scheduled to expire at the end of 2012.

Europe also remains a concern as the sovereign debt crisis and the deceleration of emerging-market growth threaten to “knock us off course,” said Federal Reserve Bank of Dallas President Richard Fisher. While demand “has slowly begun to strengthen domestically,” a slowdown in Europe and in emerging economies such as China and Brazil “and concerns about financial tripwires that might be triggered give rise to caution,” he said.

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