Fed's Moskow: Inflation biggest risk to U.S. economy
KENILWORTH, Illinois (Reuters) - The risk of inflation staying "stubbornly high" is still greater than the possibility of economic growth falling too low, Chicago Federal Reserve President Michael Moskow said on Wednesday.
"So far this year, inflation has been somewhat elevated, highlighting the risk that inflation could stay stubbornly high," Moskow said.
But Moskow stopped short of explicitly calling for additional interest rate increases from the U.S. central bank as he did in a series of speeches over the past winter and fall.
"Whether policy will need to be adjusted and the degree of any adjustment will depend on the data we see in the months to come and how that data influences our forecast of the economy," Moskow said in a speech to the Kenilworth Union Church, outside Chicago.
The Federal Reserve has held interest rates steady at 5.25 percent for its past six meetings.
Financial markets guess that the Fed's next move will be a rate cut, but see little chance of an easing before the third quarter.
INFLATION TOO HIGH
"Inflation is running too high," he said, repeating a preference for core inflation to run in the 1 percent to 2 percent range -- a zone not seen in the past three years.
Moskow, a voting member this year of the interest rate-setting Federal Open Market Committee but one who plans to retire in August, said real U.S. economic growth in the first quarter likely ran near or below the 2-1/4 percent annual rate seen in the final three quarters of 2006.
"For the balance of 2007, economic growth likely will average modestly below potential. But I expect that growth will be picking up gradually over the coming quarters and return to near potential by 2008," he said.
"Core inflation should gradually come down, moving closer to the levels I view as being consistent with price stability," Moskow added.
Some economists have said that the U.S. has, in the past, struggled to avoid dipping into recession when growth has run below trend for an extended period.
However, Moskow told reporters that recent weak growth has been mostly a function of the housing market, without broader spillover to the overall economy, making it hard to compare with past episodes.
Housing declines "have reduced GDP growth by roughly a percentage point. That's more than enough to account for the entire shortfall in growth relative to potential," he said.
And despite soft growth, labor markets continue to tighten and productivity rates have slowed -- raising the potential for higher wage inflation, Moskow said.
Still, the strong 180,000 gain in payroll employment in March is probably not sustainable, at a time when the U.S. needs to add closer to 100,000 jobs per month just to keep up with a slower growing work force.
Inflation expectations appear contained at the moment but still pose a risk of becoming stubbornly entrenched, Moskow said.
"Ultimately, expectations of inflation depend on the public's perception of the Fed's willingness to carry out monetary policy in a manner that will ensure price stability," he said.
HOUSING STILL KEY
Moskow cited the housing market, including recent problems arising from subprime mortgages, as a key risk to the economy. Residential construction will probably be depressed for some time to work off excess inventories, he noted.
"The recent developments concerning variable-rate subprime mortgages may tend to prolong the declines in housing markets," he said, adding that those difficulties appear to be confined to a relatively small segment of the market.
Moskow also termed a slowing in business investment "somewhat greater" than might have been expected but was likely to be relatively short-lived. Business spending could rebound later this year, he later told reporters.
"The solid pace of hiring suggests a certain degree of confidence, and surveys of business sentiment have been generally steady in recent months. In addition, the fundamentals remain supportive of investment," he said.
(To access other stories on Fed policy click on <FED/AHEAD>)
