UPDATE 1-Fed's Moskow on PBS: Still wants inflation lower

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By Ros Krasny

CHICAGO, May 21 (Reuters) - Chicago Federal Reserve President Michael Moskow said on Monday that inflation is likely to fall further over time even as the U.S. economy picks up steam over the course of 2007.

"Our expectation is that inflation rates will continue to come down as well during this period and I would expect the unemployment rate will not go up a great deal," Moskow said in an interview to air Monday on PBS's "Nightly Business Report" television show.

A transcript of the interview was made available.

Moskow noted that core inflation is still running above the 1 percent to 2 percent range that some policy-makers, including himself, see as an informal comfort zone.

"I'd like to see inflation rates running lower at this point and more toward the center of that zone," he said.

In March, core U.S. inflation, measured by the personal consumption expenditures (PCE) index, dropped to 2.1 percent, year on year.

Moskow is a voting member of the Federal Open Market Committee in 2007 but will retire by the end of August.

Moskow said that U.S. economic growth is "something slower than we expected" at this point, and while he expects the housing market to stabilize "no one can say exactly when that's going to happen."

The spillover from weakness in the housing sector to the overall economy has been "manageable" so far, Moskow said.

"Will consumers slow down their spending because of the reduction in housing prices in some markets of the economy? We have not seen that to a significant extent so far."

Weakness in housing may be offset by other factors, such as the rising stock market and strong labor market, Moskow said.

"Rising equity markets do have a wealth effect," he said. That, in turn, can benefit consumers who over time might increase spending.

The strong labor market was another plus for consumer spending, Moskow said, adding that he expects "some slight increase" in the jobless rate this year from the current 4.5 percent.

Asked if the FOMC has lost enthusiasm for the concept of formal inflation targets, Moskow said analysis of the idea within the central bank was still moving ahead.

Targeting was thought to be a key platform for Fed Chairman Ben Bernanke, who assumed his post in early 2006.

"(Bernanke) said we want to study this and analyze it very carefully before we make a longer term decision going forward, and we're in the process of that now," Moskow said.