Weak Home Sales and Worsening Trade Balance Puts Fed on Hold

With home sale growth weakening and America’s trade balance worsening, the Federal Reserve announced it would not increase interest rates.

With home sale growth weakening and America’s trade balance worsening, the Federal Reserve announced it would not increase interest rates.

While many analysts and economists expected at least one rate hike in 2016 by now, the Federal Reserve decided to keep the Fed Funds’ rate target at 0.25-0.5%, with a vote of 9-1. Only the President of the Kansas City Federal Reserve, Esther George, dissented on the vote, indicating that there is broad agreement that the U.S. economy is far too weak to stand an increase to borrowing costs for car loans, student loans, mortgages, and other retail facing debt products.

Frustrated with Consumers

Despite the Federal Reserve’s dual mandate to stimulate employment and control inflation, the Fed’s public statement showed visible frustration with American consumers, who just aren’t spending enough for the central bankers’ taste.

“Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high,” the Fed said in a statement, adding, “the housing sector has improved further.” While they did not explain what they meant by “improvement,” the Federal Reserve in the past has noted that home prices are continuing to go up, although their rate of increase, at over 5% according to most studies, is more than twice the rate of wage growth.

This “improvement” means that homes are getting too expensive for Americans, who also struggle with health care and education costs that rise far above the rate of inflation.

Still, the Fed struggles to understand why Americans aren’t spending more on goods and services. “A range of recent indicators, including strong job gains, points to additional strengthening of the labor market,” the Fed said.

Yet, the Fed struggles to conflate this labor strength with soft macroeconomic data. “Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed,” the Fed said.

Trade Balance Deficit, Weak Home Sales

The trade balance deficit may partly solve the puzzle. In March, the United States had a $56.9 billion trade deficit with the rest of the world, which declined largely because of oil prices. Global free trade policies like the Trans Pacific Partnership have so far failed to eliminate this trade deficit, despite promises from politicians to the contrary.

Now, the Obama administration is trying to pass a new trade pact—the Trans-Atlantic Trade and Investment Partnership, or TTIP—that is fiercely opposed by all European counterparts except for European representatives.

Meanwhile, indicators of a strong housing market are evaporating. According to the Mortgage Bankers Association, purchasing activity fell 2% in their last MBA Mortgage Applications study, while mortgage rates were at an average 3.85% for a 30-year loan. In a separate study, pending home sales rose just 1.4% in March after extremely weak growth in February.