May 21 - The Federal Reserve is heading towards the end of quantitative easing and historically low interest rates, according to minutes from last month's meeting, but sluggishness in housing and in the labor market means any rate hike remains far away. Conway G. Gittens reports.
Getting monetary policy back to normal is what the Fed wants to do, but judging from minutes from their last meeting, policymakers are no closer in doing so. While the group discussed the "eventual normalization of the stance and conduct of monetary policy", the Fed makes clear talk and action are not the same things. The extent to which the minutes show the Fed's worry about housing, caught Moody's Analytics' John Lonski by surprise. Housing is underperforming expectations, and that's clouding the Fed's ability to see ahead. SOUNDBITE: JOHN LONSKI, CHIEF ECONOMIST, MOODY'S ANALYTICS CAPITAL RESEARCH GROUP (ENGLISH) SAYING: "Today we had surprisingly bad news on mortgage applications for a purchase of a home. Despite very nice spring weather, home buyer mortgage applications were down 12 percent from a year ago. Homebuyer mortgage applications need to rise by 17 percent just to match what they averaged during 2013's peak spring selling season for housing." The other problem, acknowledged by the Fed is the labor market. There were intense conversations about the labor force; some policymakers point to still high unemployment and low wage growth as reasons not to fear inflation, while others argue the data are masking a tightening labor market that could catch the Fed on the wrong side of inflation. But in the end, the majority of policymakers still think time is on their side. That does not include Philadelphia Fed President Charles Plosser who rocked markets by his warning rates could go up sooner than people think. SOUNDBITE: JOHN LONSKI, CHIEF ECONOMIST, MOODY'S ANALYTICS CAPITAL RESEARCH GROUP (ENGLISH) SAYING: "We have every indication that policymakers do not feel any special sense of urgency to accelerate the winding down of quantitative easing. They feel no sense of urgency to seriously consider the first rate hike and thus financial markets have reason to believe that interest rates will remain relatively low, especially at the short end, to rule out the remainder of this year and perhaps until the middle of next." So for now it seems like the Fed is stuck in neutral and that sits well with Wall Street. Stocks added on to gains on realization the Fed is all talk and no action.