Federal Reserve officials are predicting the U.S. housing recession will last longer than they anticipated, while continuing to judge that inflation is the biggest risk to the economy.
“The correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year,” the Fed recorded in the minutes at the May 9 Federal Open Market Committee meeting in Washington, D.C. That assessment was “somewhat longer than previously expected,” the Fed said.
Policy makers maintained their prediction of a pick-up in economic growth and didn’t discuss the possibility of lowering interest rates, the minutes showed. Inflation that is too high for officials’ comfort, combined with the housing slump, suggests the Fed may have little reason to cut or raise borrowing costs in the coming months.
The committee expected gross domestic product to expand “a little below the economy’s trend rate of growth through the remainder of this year and then pick up to a rate broadly in line with the economy’s trend rate in 2008,” the minutes said. Many economists and Fed officials estimate the trend rate at about 3 percent.
Fed officials voted unanimously May 9 to leave the benchmark U.S. lending rate unchanged for a seventh time, at 5.25 percent. Futures contracts show that traders also expect no change at the conclusion of the June 27-28 meeting.
The Fed kept its statement little changed this month from the previous meeting, updating the economic summary to note that “growth slowed” and inflation “remained”’ elevated.
Fed Chairman Ben S. Bernanke said in a May 17 speech “the cooling of the housing market” is an important source of the growth slowdown.
House prices in the U.S. dropped last quarter for the first time in almost 16 years, as 13 out of 20 cities recorded declines in March. A report from S&P/Case-Shiller home price index May 29 showed house prices fell 1.4 percent in the first three months of 2007 from a year before. Sales of existing homes fell 2.6 percent in April to a four-year low, an industry report showed last month.
The minutes contained no reference to a rate cut. Fed officials have consistently warned of the risks of high inflation even as recent readings moderated.
“Nearly all participants viewed core inflation as remaining uncomfortably high and stressed the importance of further moderation,” the minutes said. “Price pressures were not yet viewed as convincingly on a downward trend.”
The Fed’s preferred inflation benchmark, the personal consumption expenditures price index minus food and energy, rose 2.1 percent in the year to March, down from a 2.4 pace in February. The core consumer price index rose 2.3 percent for the year in April, down from 2.5 percent in March.
Fed officials appeared to take little comfort from one month of moderation in price gauges.
“Although readings on core inflation in March had been more favorable, this followed several months of elevated inflation data,” the minutes said. “All participants agreed that the risks around the anticipated moderation in inflation were to the upside, and some noted that a failure of inflation to moderate could entail significant costs.”
Fed policy makers also noted risks of inflation from external influences. The falling dollar “could reinforce the upward pressure on import prices,” the minutes said. The dollar fell 1.6 percent between the Fed’s two most recent meetings, according to the Fed’s Trade-Weighted Broad Dollar index.
Robust growth abroad may also “contribute to price pressures at home,” according to concerns expressed by some policy makers at the meeting.
The U.S. economy grew at an annualized pace of 1.3 percent in the first quarter, the slowest in four years and down from the 2.5 percent pace in the previous three months.
Policy makers drew optimism from the outlook for business spending, which “seemed most likely to move higher in coming quarters.” Also, consumer spending would be supported by “continued advances in employment and incomes, as well as gains in stock prices.”
