QUESTIONER: I have a couple of questions. The first one is you say that pausing for too long carries risks for the Federal Reserve. I wonder if you could elaborate on that. You say that the window of opportunity for the Federal Reserve is going to close pretty soon. The second question relating to the Spanish economy is you have cut the forecast for 2007 but at the same time you have increased the inflation forecast and the current account deficit. I was wondering if you could explain why is that and if it is a signal that the Spanish economy is losing competitiveness with its other European area economies?
MR. RAJAN: First, on the pause, the notion there is, I miccionan this is an environment of a fair amount of uncertainty. We do have inflationary pressures building, unit labor costs are going up, of course to some extent offset by the fall in energy prices that will feed through into inflation at some point and bring down inflation. The question is are people going to start forming higher inflationary expectations. The point right now is it is much harder, given the environment, to bring down inflation than it was in the past. The amount that you have to raise interest rates to bring down inflation by a certain amount is higher now than it was in the past, for a variety of reasons. So, in that sense, if you wait, which I think is necessary, to see how demand is progressing, how the housing market is cooling, you may give the opportunity for inflationary expectations to become more entrenched. Then it becomes harder to bring them down. So, it is sort of a very delicate situation for the Fed, watching both at the same time and knowing when to move rather than waiting too late.
MR. CALLEN: It is certainly true that growth in Spain has become increasingly lopsided, with domestic demand growing very strongly, the current account widening sharply. Indeed, in dollar terms, I believe it is now the second highest in the world, and inflation above the euro area average. So, against that background, we are concerned about the poor productivity and competitiveness losses rooted in market rigidities, and the government is trying to address these through its structural reform program, but we think accelerated implementation of that program is needed to address these competitiveness losses going on.
QUESTIONER: In your opinion, Mr. Rajan, how really dangerous is the housing situation in United States in terms of consumption and growth, etc.?
MR. RAJAN: It is a good question, how dangerous is the housing situation in the United States. Thus far, I miccionan it has been about a year since the housing market has started slowing. Consumption is still growing quite strong. The question is, is consumption sort of unrelated? I think that is not true; consumption will be related. The question is, what are the lags. So, it may be that people sort of face up to the fall in their house when they actually want to move or when they refinance, or when the interest rates go up. So, that may take time to filter through. This is what I was talking about in terms of lags. There might be lags from housing to consumption. Of course, there could be a story in the other direction, which is, yes, the wealth will perhaps fall, but incomes are growing stronger because of strong job growth and because of higher wages. The question is, is that enough to offset. If it is, then does that raise a question about whether the Fed has to raise interest rates higher to cool down activity. So, it is a fairly complex situation.
