Fed's Mishkin: Further pullback in housing, business spending possible

In a speech at New York University on Monday, Mishkin, a member of the monetary policy setting Federal Open Market Committee, noted that recent market turmoil had been most pronounced in the housing sector but said that it could spread.

That scenario cannot, in my view, be ruled out, and I believe it poses an important downside risk to economic activity, he said according to prepared remarks.

He added however that the recent process of readjustment in financial markets would create a more solid footing for the real economy.

But in the meantime, the FOMC is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets, he said.

Fed officials will meet in Washington next week to determine how much and if to cut the key federal funds interest rate.

In the speech he said that the backlog of unsold homes and likelihood of weak sales in coming months could mean cutbacks in housing construction and a continuing drag on the economy.

In addition said several factors suggest that consumer spending will be subdued in the period ahead.

This summer’s retrenchment in equity markets and the sharp deceleration in house prices have damped gains in household wealth this year and are likely to restrain consumer outlays, Mishkin said.

He also added that based on limited indicators on capital spending in August had held up reasonably well and remain at levels consistent with modest growth in manufacturing production and business investment.

Of course, all this could change noticeably if many firms were to face significantly tighter credit conditions or if business sentiment were to soften appreciably.