Fed's Mishkin: 'Significant' U.S. Economic Risk

MoneyNews
Tuesday, March 4, 2008

WASHINGTON -- Signs of sluggish consumer and business spending and the potential for a deeper housing downturn pose serious risks to the U.S. economic outlook, Federal Reserve Board Governor Frederic Mishkin said Tuesday.
In dovish remarks to an economics conference, Mishkin noted the Fed's economic projections show sluggish growth this year, but no downturn.

"I see significant downside risks to this outlook. These risks have been brought into particularly sharp relief by recent readings from a number of household and business surveys that have had a distinctly downbeat cast," Mishkin said.

"Most recent readings on real consumer purchases point to a soft first quarter," he told the National Association for Business Economics, adding that business spending on equipment and software seemed likely to be "subdued" in the near term.

The labor market looked to have softened in February, Mishkin said, with unemployment likely to rise this year, while house prices could continue to soften, sapping consumer demand.

Yet while inflation had risen, "longer-run inflation expectations appear to have remained reasonably well contained," he added.

Mishkin acknowledged that spreads between U.S. Treasury bonds and Treasury Inflation Protected Securities (TIPS) have widened, but he said this might be explained by liquidity factors between these two markets.

"Does this rise in forward inflation compensation indicate that long-run inflation expectations have risen by a similar amount? My best guess is that much of the rise in inflation compensation reflects other factors," he said.

In his speech, Mishkin reviewed the behavior of the TIPS market in recent years and compared the change in inflation expectations implied by the widening in spreads with the expectations expressed by economist surveys.

"What does this mean for the inflation outlook? I expect inflation pressures to wane over the next few years, as product and labor markets soften and the rise in food and energy prices abates," he said.

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