The Federal Reserve Open Market Committee was less dour in its view of the economy at its May meeting but is still focused closely on inflation, according to the minutes of the Fed's May 9 meeting.
Overall, the Fed believes the economy is okay. "In their discussion of the economic situation and outlook, participants noted that their assessments of the medium-term prospects for economic growth and inflation had not changed materially from the previous meeting," stated the minutes. "The pace of economic expansion had slowed in the first part of this year, but the recent sub-par performance probably exaggerated the weakness of underlying demand, and the rate of economic growth was expected to pick up in coming quarters."
But the consensus wass that "nearly all participants viewed core inflation as remaining uncomfortably high and stressed the importance of further moderation."
The minutes suggested that the Fed is not convinced that inflation is in check and that it is content with the overnight funds rate at 5.25%. There was no evidence in the minutes that anyone on the committee favored interest rate cuts.
Still, the Fed remains concerned with state of the housing market and a recent slowdown in consumer spending. Housing, in particular, shows up in several sections of the minutes as having fallen into a deeper trough for a longer period than the Fed expected.
The minutes stated, "The incoming data on new home sales and inventories suggested that the ongoing adjustment in the housing market would probably persist for longer than previously anticipated. In particular, the demand for new homes appeared to have weakened further in recent months, and the stock of unsold homes relative to sales had increased sharply. That said, participants also noted that sales of existing homes appeared to have held up somewhat better since the beginning of the year. Moreover, the turmoil in the subprime market evidently had not spread to the rest of the mortgage market; indeed, mortgage rates available to prime borrowers remained well below their levels of last summer. Nevertheless, most participants agreed that, although the level of inventories of unsold homes that homebuilders desired was uncertain, 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 Fed is concerned with the impact housing could have on consumer spending. While it noted that it expected continued advances in employment and incomes, it believes recent increases in gasoline prices could have a damping effecting on spending. The minutes, however, sounded a cautionary note regarding housing: "Participants remained concerned that the housing market correction could have a more pronounced impact on consumer spending than currently expected, especially if house prices were to decline significantly."