by Calculated Risk on 2/06/2008 03:01:00 PM

From Philly Fed President Charles I. Plosser: The Economic Outlook and Challenges for Policymakers. A couple of excerpts:

On housing:

Two adjustments will continue to be needed to help work down the large number of unsold homes: further cuts in construction and declines in housing prices. I expect the decline in housing starts will bottom out in the middle of this year, but starts are likely to then be quite flat through the end of 2009 as the inventory of unsold homes is reduced gradually.

These are two key points: House prices must fall further (probably significantly further in many areas), and the current large inventory overhang will depress housing activity for some time.

On Inflation:

Unfortunately, I expect little progress to be made in reducing core inflation this year or next, and I am skeptical that slower economic growth will help.
...
There are those who have expressed the view that in times of economic weakness, the Fed must not worry about inflation and should focus its entire effort on restoring economic growth by dramatically driving interest rates down as far and as rapidly as possible. To borrow a line attributed to that famous, or perhaps infamous, Union Admiral David Farragut at the Battle of Mobile Bay, it is sort of a “damn the torpedoes, full speed ahead” approach to policy. But the Fed has a dual mandate for a reason. Price stability is a necessary component for achieving sustained economic growth. Ignoring price stability during times of economic weakness risks undermining our ability to achieve economic growth over the long run. It fuels higher inflation down the road and risks inappropriate risk taking and recurring boom/bust cycles. This would be counterproductive.

With these comments on inflation, it's important to note the Plosser is a voting member of the FOMC. Still, even with these concerns about inflation, and depending on the data, I expect a 50bps or 75bps Fed Funds rate cut at the March meeting.