Tuesday, August 22, 2006

Fed's Moskow: Inflation Risk Greater than Slow Growth

by Calculated Risk on 8/22/2006 01:39:00 PM

From Reuters: Fed's Moskow-More rate increases could be needed

This month's pause to the Federal Reserve's string of interest rate hikes was "constructive," but more rate increases could still be needed to cut inflation, Chicago Federal Reserve President Michael Moskow said on Tuesday.

"The risk of inflation remaining too high is greater than the risk of growth being too low. Thus some additional firming of policy may yet be necessary to bring inflation back into the comfort zone within a reasonable period of time," Moskow said in remarks prepared for a speech to the McLean County Chamber of Commerce.
"We need to balance the benefits of gaining new information against the costs of waiting too long. If inflation stays stubbornly high while we wait to see the effects of earlier policy actions, inflation expectations could increase -- and that would be very costly," said Moskow.

Current levels of job creation -- while below Wall Street expectations of the past few months -- were roughly consistent with potential growth, and the jobs market is solid, he said.

"Higher energy prices, the slowing in housing markets, and other factors should push near-term growth a bit below potential for a short period. However, I don't see evidence of a more worrisome downshift in activity," he said.
Here is Moskow's speech: U.S. Economic Outlook. Here are his comments on housing:
Of course, there are some risks. One relates to housing. The orderly declines that we've been expecting could become more significant. Housing had been an area of strength for an extended period during this business cycle. The large increases in home values added an indirect boost to household spending growth by increasing homeowners' wealth.

Some analysts say that housing is overvalued and that prices are going to decline nationwide. To be sure, we currently are seeing a good deal of softening in housing markets, and home prices are increasing at a slower rate. Looking ahead, most forecasts for GDP growth factor in slow home price appreciation and marked declines in residential investment. But it seems unlikely that prices will actually decline for the nation overall. Housing markets are local in nature. Home prices have risen only modestly in Chicago, Bloomington, and most Midwestern cities; the largest increases have occurred in cities such as Miami, Phoenix, and Las Vegas. Even if there were large price declines in some cities, there probably would be little spillover to a more general drop in prices nationwide. And even if prices did decline nationally, history suggests that the impact on consumer spending would be modest and gradual.
Did I read that right? House prices won't decline nationally, but if they do, the impact on consumer spending would be "modest". That is a fairly optimistic outlook!