U.S. consumer confidence slipped to a nine-month low in August on inflation and job worries, while minutes of the Federal Reserve's policy meeting showed most officials thought inflation would ease in the months ahead.
The minutes released on Tuesday also revealed the Fed's decision to hold interest rates steady at 5.25 percent on August 8 after 17 straight increases was a close call, showing officials remain concerned about a sudden pick-up in price pressures.
However, the policy-making Federal Open Market Committee said in the minutes that keeping rates unchanged would allow time to judge whether more tightening is needed to maintain price stability.
Earlier on Tuesday, the Conference Board said its consumer confidence index tumbled to 99.6 in August, from an upwardly revised 107.0 the prior month, as anxiety about job growth and future inflation dented consumer optimism.
The August reading was the lowest since November 2005 and well below Wall Street's forecast of 103.0. It also marked the biggest one-month decline since September 2005 in the aftermath of Hurricane Katrina.
U.S. stocks slipped after the confidence report (^SPX - news) but turned positive after the minutes suggested the Fed could keep rates on hold a bit longer.
Benchmark government bond prices pared losses and the dollar weakened modestly versus the yen and euro on the belief that a weaker economy will keep interest rates on hold.
When the news first came out, it was a double-edged sword because we had weak consumer confidence numbers and then (the Fed) said they would not be more tolerant of inflation, said Anthony Conroy, head trader at BNY Brokerage, a unit of the Bank of New York.
But people think inflation seems to be slowing, he said, adding that will be interpreted as a hold on rates.
But Michael Panzner, vice president in sales trading at Collins & Stewart in New York said the fact it was a close call suggests (the Fed) wasn't as comfortable with pausing as the market believed, suggesting more near-term rate hikes could be on the horizon.
In a speech on Tuesday in Texas, Dallas Fed Bank President Richard Fisher, said some inflation risks remain and reiterated that central bankers abhor inflation. We do it viscerally, it is part of our DNA.
For consumers, it's not just inflation but also jobs that have people worried about the future. The Conference Board said those expecting more jobs to become available in the coming months fell to 14 percent this month, from 14.3 percent in July.
Those expecting fewer jobs increased to 18.3 percent, from 16.5 percent the month before.
The government will release its August employment report on Friday. According to a Reuters poll, economists' median estimate looks for a relatively modest 120,000 new jobs in August, mostly steady with July's 113,000 gain.
The decline in confidence also suggests U.S. consumers may finally be feeling the pain of the housing market and the fluctuations in oil prices, said Kathy Lien, chief strategist at Forex Capital Markets in New York.
Last week, reports showed that sales of new and existing homes in July both tumbled by more than 4 percent. Inventories of homes for sale hit levels last seen a decade ago or more.
Rapid housing price gains have been the main engine of U.S. growth in recent years, allowing consumers to keep borrowing against the soaring value of their homes to finance spending.
But two separate reports detailing higher U.S. chain store sales suggested shoppers haven't cut up their credit cards just yet.
Redbook Research said on Tuesday that chain store sales climbed 3.5 percent last week from a year earlier following a 3.3 percent rise the prior week.
The International Council of Shopping Centers and UBS said in a separate report that chain stores sales rose 0.6 percent last week from the previous week.
No one has been able to prove to me that (declining confidence) has any impact on people spending because confidence goes up and down but spending keeps going on, said Robert MacIntosh, chief economist at Eaton Vance Management in Boston.