back to talking the talk

By Greg Robb, MarketWatch
Last Update: 12:50 PM ET Jan 10, 2007


Chicago Fed's chief: Key is whether easing trend can be sustained
WASHINGTON (MarketWatch) -- Inflation has been moving in the right direction, but it's still too early to think about relaxing monetary policy and bringing down interest rates, the president of the Federal Reserve Bank of Chicago said Wednesday.
"Although the recent news has been favorable, risks to the inflation outlook remain," Michael Moskow said in a speech prepared for delivery to a business conference in Iowa.
The threat of higher inflation remains "my predominant concern," Moskow said.
Core inflation, as measured by the personal consumption index, eased to an annualized 2.2% rate in November from a high of 2.4% in October.
Moskow cautioned, howerver, that the Federal Reserve policymakers must be certain that this improvement is not "transitory."
In addition, Moskow said the nation's 4.5% unemployment rate may be dangerously close to the level that might spur inflation higher.
The relationship between inflation and unemployment is controversial. Before the mid-1990s, economists believed that if the unemployment rate fell below 6% than inflation pressures would increase. But the prolonged period of low employment has changed that view.
Moskow noted that economists said in a recent survey that the unemployment rate would have to fall below a range of 4.5% to 5.5% to spur inflation, meaning the 4.5% unemployment rate in December is at the bottom of the range.
"This suggests we need to be vigilant for the possibility of increases in inflationary pressures," said Moskow, who is a voting member of the Federal Open Market Committee this year.
Moskow's remarks suggest he wants the central bank to stick to the position that interest rates may have to be raised again in coming months to counter the threat of inflation. This has been the FOMC's position since it halted hiking interest rates in August.
The FOMC will next meet to consider monetary policy and interest rates on Jan. 30 and 31.
Growth outlook
Moskow also said he remains optimistic that the economy would pick up in coming months and return to its potential growth rate for gross domestic product, estimated by economists to be around 3.0% on an annualized, inflation-adjusted basis.
U.S. real GDP growth fell to a 2.0% growth rate in the third quarter, after increasing at a 2.6% rate in the second quarter.
Growth has been held back by continued weakness in the housing sector, but Moskow observed that "the economy outside housing has been on good footing."
Moskow also dismissed fears that the weakness in housing may spark a more general economic decline.
Although there may be further weakness in home construction, "I do not expect a large spillover ... to other sectors of the economy," he said.
There has been no sign of lower home prices causing consumers to rein in their spending.
Greg Robb is a senior reporter for MarketWatch in Washington.