Gentle Ben is not the only central banker who is worried about housing. Based on the latest minutes of the policy-making Federal Open Market Committee, it seems that the entire panel thinks America’s real estate slump is going to persist for a while.
Minutes of the May 9 FOMC meeting, released Wednesday, encouraged investors to think that the central bank would not raise interest rates despite growing inflationary pressures in the U.S economy. Market sentiment has been shifting between predictions of a rate cut to bail out the housing sector and put some life into a flagging economy, and fears that inflation would force the central bankers to resume their campaign of interest rate increases, which was halted a year ago.
Despite a weaker than expected housing market and a sluggish economy, officials remained focused on the “risk that inflation would fail to moderate as expected,” according to the minutes. “Future policy adjustments would depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”
The committee expects core inflation to dip over the next two years, but the members were not incredibly confident that it was locked in a downward trend. While core inflation readings were “favorable” in March, with core personal consumption expenditure (PCE) prices, excluding energy, remaining unchanged, it followed multiple months of high inflation. “Nearly all participants viewed core inflation as remaining uncomfortably high and stressed the importance of further moderation,” the minutes said.
With inflation worries fixed at center stage, it now seems highly unlikely that the FOMC will lower the federal funds rate from the current 5.25% this year, unless there is a major downturn in the economy — which the Fed does not anticipate.
However, the economy’s rebound remains tied to the lumbering housing market. The subprime implosion has aggravated an already weak market by increasing the number of foreclosures, adding to a balloning inventory glut and prompting lenders to tighten credit standards.
“Recent readings on sales and inventories of new homes had been interpreted by the staff as suggesting that the ongoing contraction in residential investment would continue for longer than previously expected,” the minutes said.