The Federal Open Market Committee (FOMC) in its June 22-23 meeting decided to maintain its target zero to 0.25% federal funds rate despite signs of slowdown in economic and housing growth, according to meeting minutes released this week. Data on production and spending since the Feds’ last meeting remained aligned with expectations, but the pace of economic expansion over the next year and a half looks to be somewhat slower than previously predicted. “Although readings from the housing sector had been strong through mid-spring, participants noted that the strength likely reflected the effects of the temporary tax credits for homebuyers,” the FOMC said in its minutes. “Indeed, data for the most recent month suggested that, with the expiration of those provisions, home sales and starts had stepped down noticeably and could remain weak in the near term; with lower demand and a continuing supply of foreclosed houses coming to market, participants judged that house prices were likely to remain flat or decline somewhat further in the near term.” Economic data was mixed since the last meeting, with private payroll figures “considerably weaker” than expected in May, for example. The outlook in commercial real estate (CRE) markets stayed weak, too, with CRE prices falling and sales remaining light in Q110. The delinquency rate among securitized commercial mortgages continued to climb in May, the FOMC said. The production of CRE and home equity loans fell at a slightly faster rate than in recent quarters, but the contraction in closed-end residential loans abated, according to the FOMC minutes. Consumer loans declined again, on average, in April and May. Additionally, the amount of Treasury and agency securities held by large domestic banks and foreign-related institutions declined in May, contributing to a sizable drop in banks’ securities holdings. Kansas Federal Reserve Bank president Thomas Hoenig once again dissented on keeping “exceptionally low levels of the federal funds rate for an extended period” after the first year of modest economic recovery. Communicating such an expectation, he said, could limit the FOMC’s flexibility to begin raising rates modestly. Write to Diana Golobay.
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