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In a prepared speech yesterday, Fed Chairman Ben Bernanke said that inflation was "uncomfortably high" and remains a major concern for the Fed.

Over the past few weeks, the Fed has consistently said that it expects economic growth over the next year to fall in the 1-2% range, down about 1% from the current conditions.  The Fed has reiterated time and time over that housing will lead the cooldown as the (anti-)Wealth Effect curbs consumer spending.

However, Bernanke specifically remarked that the slowing housing market has not yet slowed down other industries, as had been anticipated.  Remember back to the Fed's last press release in which they wrote that a "cooling of the housing market" slowed economic growth.

If housing is not spilling over to the rest of the economy, the Fed may not get the slowdown they planned for.  And, if the Fed no longer believes that housing will create a 1% drop in growth, we need to all be prepared and adjust our expectations of inflation.

Bernanke fired the first warning shot and he did it in plain English.  Strangely, the market's reaction was muted.  Mortgage rates held steady.

Source
Fed Chief Optimistic of Soft Landing
Nell Henderson
Washington Post, November 29, 2006
http://www.washingtonpost.com/wp-dyn/content/article/2006/11/28/AR2006112800635.html

Parsing the Fed
Wall Street Journal Online, October 25, 2006
http://online.wsj.com/public/resources/documents/info-fedparse0610.html

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.