Fed official: sub-prime storm clouds economy

Problems in the sub-prime mortgage market have not spread but are clouding the outlook for housing and the U.S. economy as a whole, Federal Reserve Bank of Dallas President Richard Fisher said Wednesday.

“Thus far, the damage from the sub-prime market has been largely contained. ... Quality problems have arisen primarily for adjustable-rate sub-prime loans, which are only about 8.5% of home-mortgage debt outstanding,” he told the Austin Mortgage Bankers Assn.

“Nevertheless, because 40% of home buyers last year were non-prime

But Fisher, who is not a voting member of the U.S. central bank’s policy-setting committee this year, also stressed that inflation remained the main threat to the economy.

“There is no denying that this kind of situation dampens economic growth ... I would like to see inflation lower than it currently is,” he told reporters after the speech.

“I am hopeful inflation will moderate, but we must always remain vigilant,” Fisher said.

Sub-prime mortgages are extended to borrowers with poor credit histories. Rising delinquencies among such borrowers, together with credit-protection filings by several major sub-prime lenders, have created worries about the economy as a whole. Fisher took pains to stress that the economy remained on solid ground.