Federal Reserve policy maker Thomas Hoenig said on Wednesday he was open minded about the future direction of U.S. interest rates but was on alert for fallout from financial market woes.
Investors are split on whether the Fed will lower its key interest rate when it next reviews policy on Oct. 30-31 after a hefty half a percentage point cut last month aimed at shielding the U.S. economy from a housing slump.
"The question that one asks is what are the implications for policy and the answer to that is obvious and is wait and see. Because it depends on how all these factors play out," Hoenig, president of Federal Reserve Bank of Kansas City, told a dinner audience.
"I'm optimistic, but I am also realistic and I want to stay alert as we move through this tender time," he said in response to a question after delivering an outlook on the economy.
Hoenig is a voting member of the Fed's interest rate-setting committee this year and he spoke at a dinner hosted by the Kansas City Fed.
The housing downturn was underlined by data earlier on Wednesday showing that groundbreaking for new U.S. homes and permits for future building both slumped to a 14-year low in September.
In somewhat dovish remarks that stressed the risks to the real economy, Hoenig said the housing market's problems had slashed around a percentage point from U.S. growth, to a pace around 2 percent.
He also noted that this was below the economy's long-run potential growth rate -- at which it can expand without sparking inflation -- while noting that inflation had in fact slowed.
Hoenig's remarks also followed the release of the Fed's Beige Book. This collection of anecdotal accounts of the economy found the U.S. economic expansion had slowed in September and early October, housing markets had weakened, and lenders tightened credit standards.
The U.S. central bank reported that five of its twelve districts experienced a slower economic growth rate, while the remaining districts saw the pace of growth hold steady. The Beige Book is put together by the 12 regional Federal Reserve branches.
Hoenig said the Fed's policy actions had helped stabilize conditions, but there are "still vulnerabilities out there", sentiment echoed by William Dudley, executive vice president of the Federal Reserve Bank of New York.
"It will take time for circumstances to return to normal," Dudley said in a speech to the Global Interdependence Center in Philadelphia. "Even if subprime delinquency rates keep climbing to unprecedented levels, it seems likely that total losses will be roughly in a range of $100-$200
billion," he said. That amount has been voiced by Fed Chairman Ben Bernanke.
Hoenig said the weaker housing market had had a direct impact on the construction industry, and sectors like furniture sales. Cooling housing prices also have a so-called wealth effect on consumer spending.
At the same time, however, there were some offsets like stronger demand for U.S. exports thanks to a weaker dollar.
"The U.S. economy has got a lot going for it. For example, the fact that we have already eased policy is a positive factor for the real economy. Secondly, the rest of the world is still growing strongly and demand for U.S. goods is strong."
"Consumers are still buying, unemployment is low, we are still adding jobs in a very dynamic U.S. economy," he said.