Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

A key question for the outlook is: What will be the full extent of the housing slowdown?

The most recent data on housing have been mixed and downside risks remain...

That said, the longer-term fundamentals for housing in the U.S. remain positive. The same factors that supported the housing boom—strong productivity trends and low borrowing rates relative to historical norms—are still in place. These factors likely put a floor under how far housing will decline. So I think home building will stabilize as we move through the year, but I don't expect to see any noticeable increases, either.

Federal Reserve Bank of Minneapolis President Gary Stern said Friday that recent problems in subprime mortgage markets haven't had any spillover effects yet, but cautioned those types of forces haven't been fully 'stress tested.'

Stern was speaking at a monetary policy conference in Washington with other officials.

As reported by DJ Newswires

...I still think that the underlying economic fundamentals are conducive to a pickup in growth as we move through 2007 and 2008.  So I am not prepared to significantly change my projections at this time.

"The outlook for the U.S. economy has not materially changed," Kroszner said during a question-and-answer session at a community banking conference in Washington. 

  "The financial markets seem to be working well and there seems to be sufficient liquidity in the system to respond to the rapid changes that have been occurring recently," Kroszner said, in a nod to recent sharp declines in Asian and U.S. equities markets.

As reported by Dow Jones Newswires

The U.S. economy continues to demonstrate extraordinary resilience, no doubt supported by the ability of financial markets to absorb substantial shocks. Financial markets have been buffeted by a number of significant events, including a spate of corporate accounting scandals, the bond rating downgrades of Ford Motor Company and General Motors Corporation to speculative-grade status, the failure of Refco, (at the time the largest broker on the Chicago Mercantile Exchange), and the imposition (and pullback) of capital controls in Thailand. But the effects on broader markets appear to have been remarkably contained. Even the episode last year involving the hedge fund, Amaranth, which accumulated losses of $6 billion in a few short weeks, seemingly had little impact beyond its direct stakeholders.

To me, and I believe the mainstream forecasters both in government and out - we don't see a recession on the horizon," Poole said after a speech in Santiago. Moreover, "the market itself, to me, is not showing evidence that estimates of recession are really in the cards."

Recession, I guess in one sense, is always possible. I think the probability is not very high. I think the probability is a little higher than it might have been two years ago. But the prevailing forecasts certainly do not include recession in the U.S. outlook.

People who are forecasting a recession are decidedly a minority view at this time.

I will say that the Federal Reserve, in collaboration with the president's working group, has been closely monitoring the markets. They seem to be working well, normally.

We've also, of course, been closely monitoring the economy, looking at new data and trying to evaluate their implications for the forecast.

And my view is that taking all the new data into account that there is really no material change in our expectations for the U.S. economy since I last reported to Congress a couple of weeks ago in the Humphrey-Hawkins hearings.

 ...We are looking for moderate growth in the U.S. economy going forward.  And I would add, parenthetically, that the downward revision of the fourth quarter GDP numbers we got this morning is actually more consistent with our overall view of the economy than were the original numbers.

...So we expect moderate growth going forward. We believe that if the housing sector begins to stabilize and if some of the inventory corrections that are still going on in manufacturing begin to be completed, that there's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year.

During Q&A session.

Our assessment, though -- while this is a very important problem and an issue, obviously, for many people who are facing foreclosure, our assessment is that there's not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy and the lending side of that still seems to be healthy.

From the Q&A session

Well, when you've been through a cycle of expansion as we have since, really 2001, the recovery is, as what people like to say, long at the tooth, and that when you get this far away from a recession, invariably, forces build up for the next recession. And indeed we are beginning to see signs of, for example in the United States, profit margins, after extraordinary upward-side moves, have begun to stabilize. Which is an early sign that we are in the later stages of a cycle.

But I think, having said that, the probabilities of forecasting a recession are probably more in the area of a third than they are more than a half. And while yes, it is possible that we could get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed they are projecting forward into 2008 at a reasonably good level with some slowdown. Is George Soros correct? I frankly don't know. I do know that it is very precarious to try to forecast that far in the future. And I mean six months, eight months in the future is a very long forecast. So I'm not concerned as he apparently is, but I can't obviously rule out the possibility.

Still, given the probability of some tightness, we would need to see real GDP growth remain moderately below its long-run trend for a time to have confidence that the economy is heading for a soft landing with inflation continuing to move lower. The impetus for the needed moderate growth is likely already in train, given the cumulative effects of the 17 stepwise increases in the funds rate that began a couple of years ago.

In setting policy, the Federal Reserve needs to be mindful of the risks to the outlook for both growth and inflation. In my judgment, while some risks to the outlook for growth remain a concern, these have diminished noticeably in recent months. Housing will likely still be a negative for growth during the first half of this year, but it has shown signs of stabilization. And the risks of spillovers to other parts of the economy do not appear to be unduly large.  

At this early juncture in 2007, I think it entirely reasonable to expect the economy to maintain an average pace of 3 percent growth for the year. And, if we at the Fed do our job well, we should be able to accommodate that growth rate while bringing inflation down below 2 percent

If, however, core inflation seems to be settling at a rate above 2 percent, then such an outcome would be unacceptable to me. I put a very high weight on the Fed’s responsibility to maintain low and stable inflation...

My commitment, certainly, is to do what I can to promote policy adjustments that will yield an inflation outcome, on average over a period of several years, centered on 1½ percent on the core PCE price index. Such an outcome will ensure that the FOMC maintains its current high level of credibility. Maintaining price stability is central to maximizing sustainable economic growth and the highest possible level of employment.