A Federal Reserve president spoke today. "The United States faces a risk that Asian central banks which are still hungry for U.S. assets will one day reach their limit and reinvest at home, Chicago Federal Reserve President Michael Moskow said Thursday. For now, the U.S. economic outlook looks good, although inflation expectations bear watching, Moskow said."

"Moskow's comments on inflation and the dangers of the big U.S. current account deficit roiled stock markets and triggered selling in U.S. Treasury debt markets."

"Eventually countries investing in the United States, such as China, Japan, developing East Asian nations and major oil exporters, 'will reach their desired allocations of U.S. assets,' he said. 'They're going to want to bring back and invest in their own countries,' Moskow said, adding that the timing and pace of such a trend was hard to estimate."

"Traders, who periodically fret about a messy unraveling of the current account gap that might send long-term U.S. interest rates soaring and trigger a steep fall in the dollar, keyed off this remark. 'He said at some point Asians will bring funds home, which wasn't very helpful. One response may be the Fed having to raise interest rates to keep the dollar from collapsing as a result,' said Michael Panzne."

"Moskow said a probable slowdown in U.S. housing markets 'should be an important factor in bringing growth back to potential' as the Fed has forecast for 2006 and 2007. But if housing remained solid 'this would heighten the risk of above-trend GDP growth' and could be inflationary, he said."

"Rates on 30-year mortgages rose this week to the highest level in 2 1/2 years as financial markets began to worry more about inflation. Frank Nothaft, chief economist at Freddie Mac said the economy may continue growing at a faster pace this year and if that occurs, the Fed could boost interest rates more than financial markets are currently expecting, meaning further increases in mortgage rates."