Print

Email story

Comment

Email editor

December minutes show housing bust worried Fed

By ASSOCIATED PRESS
Published January 4, 2007

WASHINGTON - Heightened concern about the harsher-than-expected housing slump was an important factor in the Federal Reserve's decision last month to hold interest rates steady.

Minutes released Wednesday of the Fed's deliberations disclose policymakers' increasing worry about the real estate slump even as they reaffirmed their chief aim of ensuring inflation continued to recede.

The Fed kept interest rates steady at the December meeting. But the central bank left open a possible rate increase, if needed, to thwart inflation. But one Fed member, who is not identified in the minutes of the meeting, thought the Fed should have held out the possibility of a rate cut.

This member thought the Fed's statement last month "should emphasize that policy could be adjusted in either direction, depending on the evolution of the outlook for inflation and economic growth."

In its Dec. 12 policy statement, however, the Fed did not speculate about a rate cut. Rather, the policymakers hewed to previous language about the possibility of a rate increase, which most economists think unlikely.

The wording on possible interest rate moves that was suggested by the Fed member may be viewed by some investors "as a first step toward changing the forward-looking language - a sentiment with which we do not entirely disagree," said Stephen Stanley, chief economist at RBS Greenwich Capital.

The Dow ended the day up 11.37, or 0.09 percent, at 12,474.52 after surging to a new trading high of 12,580.35.

Broader stock indicators were mixed. The Standard & Poor's 500 index fell 1.67, or 0.12 percent, to 1,416.63, while the tech-laden Nasdaq rose 7.87, or 0.33 percent, to 2,423.16.

At the last Fed meeting of 2006, Fed Chairman Ben Bernanke and all but one of his colleagues agreed to leave an important interest rate unchanged at 5.25 percent. It was the fourth straight meeting without a rate change.

Many economists believe the Fed will do the same at its next meeting, Jan. 30-31, and further into the new year. The Fed's next rate step, many analysts and investors predict, may be a cut later in 2007.

At the December meeting, Fed policymakers said economic growth had slowed over the course of 2006, partly reflecting a "substantial cooling" of the housing market.

They suggested the economy was in for sluggish growth, but did not indicate that the expansion was in danger of fizzling.

According to the minutes, growth in business investment had slowed and manufacturing had cooled, partly reflecting the struggling automotive industry.

Consumer spending seemed to be holding up fairly well, yet there were risks that could change.

"Considerable uncertainty regarding the ultimate extent of the housing market correction meant that spillovers to consumption could become more evident, especially if house prices were to decline significantly," the minutes said.

Investment in home building was likely to fall in the months ahead as builders sought to reduce their backlogs of unsold homes, the minutes said. Fed policymakers also made clear that they wanted to see "core" inflation - which excludes food and energy prices - move lower. They stuck to their forecast that this was likely to occur in the upcoming months.

Since August, the Fed has held rates steady. Before that, though, it had steadily boosted rates - 17 times - since June 2004 to fend off inflation.

[Last modified January 3, 2007, 23:08:04]