Fed sees housing correction dragging on

Fed sees housing correction dragging on
By Krishna Guha in Washington
Copyright The Financial Times Limited 2007
Published: May 30 2007 21:17 | Last updated: May 31 2007 00:00


The correction in the US housing market will “probably persist longer than previously anticipated”, Federal Reserve policymakers judged at their last meeting, according to minutes released on Wednesday.

The minutes show that Fed officials meeting on May 9 were concerned by the decline in new home sales and the rise in the inventory of unsold homes relative to the rate of turnover.

Most of the members of the Federal Open Market Committee felt that weak residential investment would “continue to weigh heavily on economic activity through most of this year” – longer than expected.

Fed officials had earlier suggested the drag from residential construction would begin to ease from the second quarter onwards.

Since May 9, new home sales have ticked sharply up. However, with median new home prices sharply lower and existing home sales weak, the Fed may still think housing adjustment is likely to be more drawn out than it originally thought.

Fed officials said they expected that a flattening out of house prices nationwide would produce a “gradual increase” in the savings rate over the medium term.

But they “remained concerned the housing market correction could have a more pronounced impact on consumer spending” – especially if house prices were to decline “significantly”.

Fed officials expressed optimism the manufacturing inventory correction was largely over, and business investment would “most likely move higher in coming quarters”. They felt weak firts-quarter growth “exaggerated the weakness of underlying demand” and believed the rate of economic growth would “pick up in the coming quarters”.

Overall risks to growth “were judged to have diminished slightly” since the last meeting in March.

Nearly all Fed policymakers, meanwhile, still saw inflation as “uncomfortably high”.

Although the March core inflation reading was “more favourable” this followed several months of elevated data and “price pressures were not yet viewed as convincingly on a downward trend”.

The minutes offered no hint that any members of the committee felt the risks to growth were equal to or more important than the risks of inflation.

Policymakers agreed “the risk that inflation would fail to moderate as desired remained the committee’s predominant concern”.

With unemployment still low, Fed officials viewed the “apparent tightness of the labour market” as a “significant source of upside risk to inflation”.