Fed sees inflation as biggest concern
Bank: Housing woes worse than it thought
WASHINGTON -- Federal Reserve officials acknowledged they underestimated the U S housing recession, while continuing to view inflation as 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 -- somewhat longer than previously expected," the central bank said in minutes of the May 9 Federal Open Market Committee meeting released yesterday in Washington.
Policy makers kept their prediction of a pick-up in economic growth and said "downside risks" to the expansion have "diminished slightly." Inflation that's too high for officials' comfort, combined with the housing slump, suggests the Fed may not adjust interest rates in coming months.
The committee foreshadowed that the economy will expand a "little below" the "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." Many economists and Fed officials estimate the trend rate at about 3 percent.
Fed officials voted unanimously this month to leave the benchmark U S lending rate at 5.25 percent for a seventh meeting. Futures contracts show that traders also expect no change at the June 27-28 gathering.
"It is the first time they have take such an aggressive posture on housing," said Anthony Chan, managing director and chief economist at JPMorgan Private Client Services Group in New York and a former Fed economist. "In the past, they have said, in essence, `Don't worry about it.' "
House prices in the United States dropped last quarter for the first time in almost 16 years . A report from S&P/Case-Shiller Tuesday 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 week.
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."
