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Fed's Moskow Says More Rates Hikes Could Still Be Needed

Chicago Federal Reserve President Michael Moskow on Wednesday did not rule out another interest rate increase to tamp down inflation, even after a recent run of soft economic data.

The risk of high inflation is still greater than the risk of economic growth falling too low, Moskow said in remarks broadly similar to his most recent speech on Feb. 16.

"It is much too early to say that inflation is no longer a concern," Moskow said in remarks prepared for a speech to the Jewish United Fund. A copy was made available in advance.

Moskow said he had not significantly changed his projections following recent weak data, and still looks for growth to be slightly below potential in 2007 and near potential in 2008.

"I expect the economy to continue to operate at a high level relative to its potential, which could eventually lead to the emergence of increased inflationary pressures," he said.

The extent of the housing slowdown remains a key question, and recent data show downside risks continue, especially given an overhang of inventory, Moskow said.

Moskow said the risks of housing weakness cascading over to other sectors of the economy do not seem unduly large.

However, "there also are financial risks associated with the declines in housing markets. Notably, defaults on subprime mortgages could have a larger-than-expected effect on households and lenders," he said.

Moskow, a voting member of the interest rate-setting Federal Open Market Committee this year, said that inflation "at the middle or bottom" of the ranges forecast by the FOMC in February "would represent reasonable progress toward price stability."

The FOMC's central tendency forecast is for inflation, measured by the personal consumption expenditures price index, to run between 2 and 2.25 percent in 2007 and between 1.75% and 2% in 2008.

Moskow repeated that he likes core inflation, stripping out volatile food and energy costs, to run between 1% and 2%, and most preferably near the middle of that range. Core inflation has been running above the top of that range for some three years.

Moskow said inflation risks have eased in recent months and continue to be helped by the fall in energy prices.

Still, healthy labor markets and solid productivity growth should continue to support consumer spending and keep consumption growth in line with longer-run trends, he said.

Unemployment is likely to change little this year from its current low level, maintaining the risk of wage inflation as employers bid up to attract and retain workers.

"If actual inflation does not show clear enough signs of returning to the center of the range I associate with price stability, there is a danger that expectations of inflation could run too high, which would likely be a self-fulfilling prophesy," he said.

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