The problems in the subprime mortgage market remained contained but were clouding the outlook for the wider housing market, and the U.S. economy as a whole, Federal Reserve Bank of Dallas President Richard Fisher said on Wednesday.
"Thus far, the damage from the subprime market has been largely contained ... quality problems have arisen primarily for adjustable-rate subprime loans, which are only about 8.5% of home mortgage debt outstanding," he told the Austin Mortgage Bankers Association in prepared remarks.
Subprime mortgages are extended to borrowers with poor credit histories.
"Nevertheless, because 40% of homebuyers last year were non-prime ... borrowers, housing markets may feel some short-term pains, making it less clear whether housing construction has bottomed and how long the housing downturn may last," he said.
Fisher is not a voting on the Fed's policy-setting committee this year.
"To be sure, the economy will grow somewhat more slowly because of the correction in the housing market. At the same time, other pistons in our economic engine, particularly consumption, continue pumping," he said.
The Fed held interest rates steady at 5.25% at its last meeting and removed an explicit reference to future policy firming -- a move seen as a step toward an eventual rate cut if growth weakens more than policy-makers currently expect.
Fed Chairman Ben Bernanke made plain in comments before U.S. lawmakers last week that the central bank's anti-inflation bias remain intact.
However, recent soft economic data, including a report on Wednesday on a drop in the Institute for Supply Management's services sector index in March to a four-year low, have kept hopes for a rate cut by mid-year alive.
On the other hand, Fisher stressed the housing market would adjust as lower home prices attract buyers.
"A build up in housing inventory means that responsible buyers will be able to buy homes at more affordable prices. We may have had a glimpse into this process in the National Association of Realtors report of pending homes sales released (on Tuesday)," he said.
The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in February, rose 0.7% to 109.3 from a downwardly revised level of 108.5 in January.