U.S. News

Fed's Moskow Says Subprime Problems Are Isolated


Problems in subprime mortgages are not spilling over to the rest of the U.S. housing market, which is in the process of stabilizing, Chicago Federal Reserve President Michael Moskow said on Monday.

Speaking to students at Tsinghua University in Beijing, Moskow said that after an outright drop in U.S. housing spending -- new construction and renovation -- of 12.7% in 2006, the Federal Reserve judges that the sector is leveling off.

"Our best estimate is that it is in the process of stabilising and that by the second half of the year, housing will start to pick up again," he said.

Moskow said a critical question was whether problems in subprime mortgages spill over to the broader home lending market, leading to defaults that would dampen consumer spending and, with it, the overall economy.

"I don't see that happening. There's no evidence of that happening so far. I think it's a very low-probability scenario," he said.

Moskow also said that the Fed was united in its belief that inflation is too high. But he said he believes there is enough slack in the economy to bring about a drop in inflation in late 2007 and in 2008.

The policy-making Federal Open Market Committee (FOMC) has left the federal funds rate, the benchmark U.S. money market rate, at 5.25% since June after a two-year string of increases. It reaffirmed its target after its latest policy-setting meeting on March 20-21.

Moskow said that even though inflation remains the Fed's predominant concern, it decided last week to hold that rate steady because it expects current below-capacity growth to bring down price pressures.

"We believe that there's enough slack already built into the economy in '07 to enable us to have lower inflation in '08 and at the end of '07," he said.

Moskow is a voting member this year of FOMC. He will retire in August.