Mixed Signals Suggest Fed May Hold the Line on Rates

Contradictory reports of faltering consumer confidence and rising home sales on Tuesday painted a confused picture of the economic outlook, dimming chances that the Federal Reserve Board will raise interest rates next week.

The Conference Board, a private research group, said in a closely watched survey that consumer faith in the economy plummeted in June to the lowest level in five months, with fewer respondents saying they planned to buy homes, cars or appliances. Anxiety over job security was a chief reason.

But the National Assn. of Realtors, a trade group, said sales of existing homes rose 1.4% in May, tying a record set more than two years ago.

The home sales report shows consumers were aggressively borrowing and buying as recently as last month. Although the pace is expected to slow, many forecasters had thought that would have happened by now.

In California, sales of existing homes rose 0.8% in May from April, the California Assn. of Realtors reported. From a year ago, sales in May climbed 32.8% amid continued increases in median home prices in many major regions of the state.

“Mortgage interest rates have increased during the last several months, but the effect of these recent increases has been neutralized by California’s rebounding economy--a rebound which is outpacing the nation’s economic growth rate,” said Leslie Appleton-Young, chief economist for the state Realtors group.

The group also said statewide median home prices increased during May for the third consecutive month from both the month before and a year ago--the first time that trend has occurred in five years.

The statewide median price in May was $179,100, up 0.3% from $178,540 in April. The May median price was 1.5% higher than in May 1995--the third month in a row of year-to-year increases in the median.

In Los Angeles County, the median home price fell 2.9% from last year to $170,530. In Riverside and San Bernardino counties, the median slid 4.3% from last year to $115,020. However, in Orange County, the median rose 1.4% to $216,550, and Ventura County reported a 9.4% jump to $212,200.

The reports from the Conference Board and the national Realtors group offered few clues about the pace and stamina of the economy’s growth. But the signs of weakness in the consumer confidence survey suggested that Fed policymakers may refrain from raising interest rates at their meeting next week.

“The confidence numbers muddied the waters a bit further for them,” said Joseph Liro, an economist at CIBC Wood Gundy Securities Corp. in New York. “I think the Fed’s going to take a step back and allow the picture to develop a bit further before they go.”

Fears that the economy may be growing too fast and creating higher inflation had aroused speculation that the Fed could nudge up interest rates at the meeting next week. But there have been no stark signals of rising inflation, and recent economic reports have been weak or mixed.

The confusion raised by the reports was reflected in the behavior of the financial markets, which are sensitive to any sign of impending change in interest rates. The stock market was slightly weaker by midafternoon after an early rally faded. Bond prices strengthened.

The Conference Board’s monthly reading of consumer attitudes suggested the economy could start to slow simply because consumers are becoming more frugal, which is bound to lessen demand.

An index derived from survey results slumped nearly 6 points in June to 97.6, the lowest since an 88.4 reading in January. Forecasters had been expecting a slight rise.

The latest results show consumers are considerably more pessimistic about present business conditions and the availability of jobs. It also showed fewer have plans to make expensive purchases or take vacations in coming months.

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Existing-Home Sales

Seasonally adjusted annual rate, in million of units:

May 1996: 4.26

Source: National Assn. of Realtor

Consumer Confidence

From a monthly survey of 5,000 households; index: 1985= 100

May 1996: 97.6

Source: Conference Board