Reading the tea leaves Although

Reading the tea leaves Although still concerned about inflation, members of the Federal Reserve Board's Open Market Committee did not raise a benchmark short-term interest rate in December because "developments in the housing market continued to weigh heavily on economic activity," according to notes of the meeting released today.

Members of the committee meet eight times a year to set the federal funds rate, the interest rate banks pay for overnight loans. After making 17 straight 25-basis point increases beginning in the summer of 2004, the committee has let the rate sit at 5.25 percent since June.

The notes of the Dec. 12 meeting were eagerly awaited by Wall Street investors hoping for clues about what the Fed might do with interest rates in the New Year. Members of the committee had characterized the cooling in the housing market as "substantial," which some read as a willingness to lower the federal funds rate to keep the economy from crashing.

But the meeting notes show the committee saw "some indications that home sales might be starting to stabilize," with the rate of home price appreciation slowing and mortgage interest rates on their way down. Housing starts and permits for new construction dropped sharply in October, and developers were continuing to cancel options on land purchases, the committee noted. Residential investment "was likely to fall further in coming quarters as homebuilders sought to reduce their backlogs of unsold homes," the committee said.

On the other hand, the committee "remained concerned about the outlook for inflation," stressing "considerable uncertainty as to the probable pace and extent of the moderation in core inflation and that the risks around this desired downward path remained to the upside." In other words, don't expect the committee to lower the federal funds rate anytime soon. On the contrary, the members warned in December: "additional policy firming" -- as in a resumption of interest rate hikes -- remains an option on the table.
--Matt Carter, Inman News

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