No New Rate Hike Expected Most Observers Say Fed Will Sit Tight For Now

Federal Reserve officials were confronted with conflicting economic data Monday as they prepared to decide whether higher interest rates are needed to control inflation.

Despite the mixed signals, analysts said the latest reports did not change their belief the Federal Open Market Committee will hold short-term rates steady when it concludes its two-day meeting Wednesday.

New home sales, which were expected to level off this year, unexpectedly shot up in May to the third highest level in a year. And the lowest inventory level in nearly four years could renew building activity.

At the same time, consumer spending, which drove the economy at breakneck speed during the January-March quarter, eased in May.

“I don’t think (the data) adds anything to the bigger context that would alter a ‘no-change’ or a ‘status-quo’ policy stance,” said Stuart G. Hoffman, an economist at PNC Bank Corp. in Pittsburgh.

Still, the reports raised anxiety among investors already nervous over whether Fed officials would nudge interest rates up for the second time this year to slow the economy and keep inflation in check.

The Dow Jones industrial closed down nearly 15 points after its sixth straight day of 100-point or more swings.

In its first report, the Commerce Department said both consumer spending and personal incomes rose 0.3 percent in May after gains of 0.1 percent and 0.2 percent respectively a month earlier.

Spending, which represents two-thirds of the nation’s economic activity, totaled a $5.37 trillion rate, compared with $5.35 trillion a month earlier. Incomes rose to an annual rate of $6.77 trillion, up from $6.75 trillion in April.

The government reported last week that consumer spending advanced 5.6 percent during the first three months of the year, when the economy raced ahead at a 5.9 percent annual rate. Many analysts believe the overall economy slowed to a 2 percent pace from April through June.

“At this point, the economy is growing, but not at the exuberant first-quarter pace,” said economist Lynn Reaser of Barnett Banks Inc. in Jacksonville, Fla. “As a result, the Fed almost certainly will stay on hold at this week’s meeting.”

In a second report, the department said sales of new homes shot up 7.1 percent in May to a seasonally adjusted 825,000 annual rate after plunging 8.1 percent in April. All regions except the West shared in the gain.

Analysts had expected a much smaller 2.5 percent rebound. The May sales pace trailed only the 838,000 rate in March and the 826,000 rate in February during the last year. In all of 1996, 757,000 new homes were sold.

The seasonally adjusted estimate of new homes for sale at the end of May was 280,000, lowest since 278,000 in July 1993. It represented a supply of 4.1 months at the current sales rate, smallest since a four-month supply in March 1971, and could provide an incentive for more construction.

PNC’s Hoffman noted that existing home sales jumped 4.4 percent in May to a level just shy of the record set a year ago.

“The data paint a very consistent picture of a strong housing market last month,” he said.

The Commerce report showed that sales jumped 23.9 percent in the Midwest to a 166,000 annual rate, the biggest gain since a 31.7 percent advance in January 1996.

Sales increased 15.1 percent in the Northeast to a 107,000 rate and 5.3 percent in the South, to 357,000. But they fell 4.4 percent in the West, to 195,000.

Graphic: Personal spending