A slowdown in the United States' housing market may have knocked as much as one percentage point off annual growth, but does not seem to have affected consumer demand much, a top Federal Reserve official told the Global Interdependence Center conference.

Cleveland Federal Reserve president Sandra Pianalto, who does not currently vote on US rates but will do so from 2008, said that the fundamentals of the US economy were strong and that the biggest risk was inflation.

"The predominant risk we face is that inflation does not moderate as we expect it to do. And we are keeping our eye on that issue. That's our objective and that's the issue that we have to stay focused on," she told a conference in Dublin.

Since 2005, US inflation had been averaging around 3 per cent on a medium-term basis, which was too high, Ms Pianalto said. By contrast, she did not believe that the slowest US house price growth for 14 years posed a big problem yet.

"Clearly, the adjustment in the housing markets that we've had in the United States has slowed our economic growth. According to some measures, it has taken off a full percentage point of GDP. But the fundamentals of our economy continue to be solid," she said.

"The aspect of the housing market we are still looking at is whether there is any spillover into the consumer sector, and as of yet we have not seen substantial spillover into the consumer sector. We are watching that carefully," she continued.

Many financial market experts expect that the Fed will have to lower US borrowing costs from 5.25 per cent because of the housing market slowdown.

For much of her speech, Ms Pianalto stuck to the theme that she had discussed last week at the Bundesbank in Frankfurt, namely the importance of keeping down public inflation expectations.

"Expectations can become unglued under some circumstances, even if the current inflation measures appear contained," she said.

Rising oil and commodity prices in particular brought a risk of eroding the public's trust and that inflation expectations would move higher, she said, although the Fed thought energy price impacts would dissipate over time.

"Since 2005, the three- to five-year moving average of US inflation has hovered around 3 per cent. This is above where I would like to see the trend settle in the longer run," she said. - (Reuters)