Espousing a favorable view of future economic conditions, Federal Reserve Bank of Richmond President Jeffrey Lacker told an economic roundtable in West Virginia yesterday that the housing market has merely cooled to a normal level and that the economy won't see rampant inflation despite the recent run-up in oil prices.

"It has now become uncontroversial to say that the outlook for overall economic activity is quite healthy. But six months ago, you may recall that many pundits were decidedly less optimistic," Lacker said, according to text of his speech, released by the Fed. "In the wake of the destruction caused by two hurricanes, energy prices had surged. From the end of 2004 to the peak last fall, crude oil prices rose 56 percent, wholesale natural gas prices rose 129 percent, and retail gasoline prices rose 70 percent. To some, it seemed obvious that the high energy prices would lead to a significant and persistent reduction in consumer spending, which would bring overall economic activity to the edge of recession. That didn't happen."

The cooling in the housing market, he said, is a result of rising mortgage interest rates. Low mortgage rates, combined with rising incomes, growing population, and favorable tax treatment to cause last year's explosion in home sales. Lacker said that with rates on the upswing "it is not surprising that we are seeing some signs of a tapering off of residential activity in many markets." He credited Fed policy for keeping inflation low, stating and following through on announced intentions, and preventing a 1970s-like inflation jump.

For more news and analysis on state and municipal finance, go to www.bondbuyer.com.