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Fed Chairman Ben Bernanke

PAUL J. RICHARDS/AFP/Getty Images

Disinflation, high unemployment, tumbling housing starts and European debt woes.

Acknowledging significant cracks in the economic recovery, Ben Bernanke and his U.S. Federal Reserve colleagues voted again Wednesday to keep priming the pump with record-low interest rates.

The decision to leave the central bank's key interest rate ultra-low at zero to 0.25 per cent wasn't unexpected.

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But Mr. Bernanke put some fresh concerns on the table, including a surprising plunge in new home sales, pushing the likely date for an eventual rate hike until well into next year.

"Financial conditions have become less supportive of economic growth on balance," the Fed's policy-making committee said in an unusually glum statement.

The rate decision highlights the increasingly uneven pace of the global economic rebound as the leaders of the Group of 20 prepare to meet this weekend in Toronto. While the recession is already a fading memory in countries such as Canada and Australia, prompting rate recent hikes there, the U.S. continues to sputter.

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"The Fed is in a tough spot," agreed Dan Greenhaus, chief economic strategist at New York-base Miller Tabak & Co. "Disinflation remains the order of the day while unemployment remains extremely elevated. As such, it's very difficult to justify tightening financial conditions."

The latest crack in the U.S. recovery gives President Barack Obama fresh ammunition to argue at the G20 summit that governments need to be extremely careful about pulling back from stimulus spending.

Sales of new homes in the U.S. plummeted 33 per cent in May from the previous month's annual pace to 300,000, after the Obama administration's home buyer tax credit expired, Commerce Department figures showed Wednesday.

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That rate was more than 100,000 lower than economists had expected and the fewest in data dating back to the early 1960s. Equally significant, the median price of a new home fell almost 10 per cent from the same month a year earlier - to the lowest since December of 2003.

Economists cautioned that the housing sector is smaller after the recession. So its impact on gross domestic product has declined.

But the report threw many for a loop, coming on the heals of other negative housing data. Sales of existing homes, building permits, confidence among builders and mortgage applications are all down. Worse, the jobless rate is still close to 10 per cent and private sector hiring seems to have stalled.

"Over the summer, I don't think it's going to get any better, and we'll probably see further declines" in housing, said Jennifer Lee, a senior economist at BMO Nesbitt Burns Inc. in Toronto.

"Over all, there's certainly been a setback after the end of the tax credit, and nobody was expecting anything but. But, it's been a lot more significant than expected."

Even as combined sales of new and existing homes are well above the lows at the worst points of the downturn, a recent forecast by Fannie Mae - the U.S. government's mortgage-financing agency - predicted a 12 per cent drop in total home sales during the third quarter from the three months that end on June 30. And the Mortgage Bankers Association sees overall prices tumbling another 3.6 per cent this year, after falling 4.5 per cent in 2009.

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Throw in the European debt crisis and the stock market volatility it's helping to fuel, plus the as-yet-unknown economic impact of the Gulf oil spill, and it's little wonder why Mr. Obama and Fed policy makers are apprehensive.

"Everything combined just doesn't play well for confidence in general," Ms. Lee said.

Even in Canada, whose rebound leads the Group of Seven top advanced economies, retail sales in April fell 2 per cent, five times more than anticipated, Statistics Canada reported Wednesday, a clear sign that the expected slowdown in growth has begun as the effects of government stimulus fade.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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