In an exclusive interview on cnbc.com, Chicago Federal Reserve President Michael Moskow said inflation is moving in the right direction, but the Fed isn't prepared to let down its guard.
Speaking with CNBC's Steve Liesman in Chicago, Moskow said economic growth continues to be solid, with weakness centered primarily in housing and, to some extent, the auto sector.
The Fed official pointed to productivity growth, low unemployment and strong demand from countries outside the U.S. as factors supporting his take on the economy.
"Overall, I think the economy is solid," Moskow said.
Moskow and other Fed officials have been focused in on inflationary threats, which they see as more significant than the risk of sluggish economic growth.
"We would expect some monthly ups and downs in the data, but when you look at the broad trend of the economy there is a lot of strength there," Moskow said.
Weakness in Housing
Moskow acknowledged that there has been a big decline in the housing sector and that one of the key questions will be whether the softness in housing will spill over into other parts of the economy. Right now, Moskow doesn't see that happening.
Notably, Moskow is looking for the gross domestic product to rise at about 2.8% next year, which is below historical trends. He expects growth will be stronger in the second half of the year.
"I think we have to be very vigilent about inflation, very careful, and make sure it doesn't stay at elevated levels for too long," he said.
"Core inflation has come down and we are expecting it to decline slightly over the coming year, and that is positive," Moskow said.
Fed policymakers next meet on Dec. 12. The Fed has left its benchmark federal funds rate at 5.25% at each of its last three meetings, after tightening monetary policy steadily over a two-year period to contain inflationary pressure.
Most analysts expect the central bank to leave interest rates unchanged on Dec. 12, but speculation has grown that the Fed may cut rates next year to jump-start the slowing economy.
Focus on Inflation
Fed officials, however, have been focusing more recently on the dangers of inflation rather than economic weakeness. Moskow shocked many market-watchers on Friday by not only taking an optimistic view of the economy but suggesting that further rate increases may be needed to control inflation.
In his interview on cnbc.com, Moskow said that Friday's unexpectedly weak report on manufacturing didn't change his view on the strength of the overall economy.
Moskow won't be a voting member on rates until next year, but his views are seen as an important indicator of where the Fed's thinking is right now.
Investors will be closely watching Friday’s report on November unemployment. Economists polled by Reuters expect U.S. nonfarm payrolls to add 110,000 jobs in November, after October’s gain of 92,000. They’re forecasting an increase in the U.S. unemployment rate to 4.5% in November from 4.4% in October.
However, if November payroll growth falls below the 100,000-mark, concerns about the economy will grow. These worries were already heightened by last week’s data, particularly the contraction that was seen in the manufacturing sector.
Bank of America economist Mickey Levy is forecasting nonfarm payrolls to fall to 80,000 in November from 92,000 in October. Levy’s estimate is on the low-end of expectations.
Last month, nonfarm payrolls were weaker than economists had predicted, but prior months were revised sharply higher and the unemployment rate fell to 4.4% from 4.6%.
Investors will also be paying close attention to the ISM non-manufacturing survey on Tuesday. That could help determine whether the slowdown in factory activity is spilling over into the service sector.
Last week’s Fed Beige Book indicated the demand for services remained healthy. The sector posted a surprisingly strong performance in October, with the non-manufacturing index rising to 57.1 from 52.9 in September.