Inflation Concerns Hold Funds Rate Steady

July 1, 2008--Increased insecurity over inflation kept the FOMC from reducing rates at its latest meeting and kept the federal funds rate steady. The BEA upwardly revised its GDP number for the first quarter as exports and consumer spending and business investment were stronger than originally reported. Consumer confidence continued to slide for June. Housing numbers remained mixed as existing home sales rose and new home sales fell in May.

 

Federal Open Market Committee Meeting
The FOMC kept the federal funds rate at 2% during its latest meeting, citing concerns over inflation as its motive for holding rates steady. Though the committee noted that the economy continues to expand, it noted many concerns, specifically, the labor market, financial markets, restricted credit conditions, the housing downturn, and high energy prices. In its latest statement, the committee appeared more upbeat about the general economic outlook, as it noted that while "downside risks to growth remain, they appear to have diminished somewhat." Moreover, the FOMC seemed more worried about inflation rather than negative economic growth, as it noted "upside risks to inflation and inflation expectations have increased."

 

Gross Domestic Product
The Bureau of Economic Analysis' latest estimate of 1st quarter GDP revealed that the economy grew at a 1.0% annual rate, upwardly revised from their second estimate of 0.9%. Upward revisions to exports and consumer spending and business investment were largely offset by an upward revision to imports and a downward revision to inventory investment. The overall economy remains weak, especially as the effects of the faltering housing and credit markets ripple through the broader economy.

 

Consumer Confidence
Consumer confidence plummeted in June, dropping 6.8 points to 50.4 from 57.2 in May. Currently, the index stands at a 16-year low and is now at its fourth lowest point since the history of the index, which began in 1969. Increased energy prices, uncertainty in financial, housing and credit markets, tight household finances, and a weakening labor market continue to worry consumers.

 

Existing Home Sales
According to the National Association of Realtors, existing home sales rose 2.0% in May. Sales of both single-family homes and condos increased. Discounted prices may be attracting buyers back into the market. The median existing-home price is off 6.3% compared to a year ago. A weak housing market is expected the year, as continued concerns over credit quality and unstable financial markets will keep standards for mortgage underwriting high, thus keeping demand low.

 

New Home Sales
New home sales decrease 2.5% in May to 525,000 units. Furthermore, inventory also worsened, up to 10.9 months, from 10.7 months in April. The median price of a new single family home also decreased and stood at $234,437 in May after increasing in April. The latest figures confirm that the housing market is still correcting itself and a quick recovery is unlikely due to tightened lending standards and continuing uncertainty in financial and credit markets.