Monday, September 10, 2007


Fed's Yellen Sees `Significant' Pressure on U.S. Economy

Yellen Sees `Significant' Pressure on U.S. Economy

By Scott Lanman and Vivien Lou Chen

Sept. 10 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. economy is under ``downward pressure'' from the turmoil in credit and housing markets.

``It is critical to take a forward-looking approach -- gauging the effects of recent developments on the outlook, and, importantly, the risks to that outlook,'' Yellen said in a speech to a conference in San Francisco. Declining home prices and rising unemployment may cause ``significant'' risks to consumer spending, she said.

Yellen noted that investors increased bets that the Fed will reduce interest rates next week, with at least 0.75 percentage point of cuts by year-end. In a speech earlier today, Atlanta Fed President Dennis Lockhart declined to repeat remarks he made just four days ago that there weren't ``conclusive'' signs of economic weakness.

``I see significant downward pressure based on recent data indicating further weakening in the housing sector and the tightening of financial markets,'' Yellen said at the annual meeting of the National Association for Business Economics. Higher interest rates and ``tighter terms'' on home loans may also lead to cutbacks in consumer spending, she said.

Rate Expectations

Economists and investors expect the Federal Open Market Committee to lower its main interest rate by at least a quarter- percentage point from 5.25 percent when policy makers meet Sept. 18. Yellen, who doesn't vote on rates this year, said recent data ``tell us less about the appropriate stance of policy than they normally would'' and that officials must judge how financial developments affect employment, output, and inflation.

After the Fed on Aug. 7 said inflation was still its ``predominant'' concern, the central bank revised its outlook on Aug. 17 to say that economic risks had risen ``appreciably.'' That assessment ``apparently is similar to that of market participants,'' Yellen said in her first speech on the economic outlook in almost two months.

``Investors' perceptions of increased downside risks have resulted in a notable decline in the rates on federal funds futures contracts and their counterparts abroad,'' she said.

Employers cut 4,000 workers in August, the Labor Department said Sept. 7. None of the 88 economists surveyed by Bloomberg News had predicted a decline. Revised figures showed that 69,000 jobs were added to payrolls in June, down from 188,000 in May. In July, employers added 68,000 workers.

Plosser Remarks

Philadelphia Fed President Charles Plosser expressed skepticism two days ago. He said in an interview that he hadn't made up his mind. ``We want to be careful not to overweight one piece of information,'' Plosser said after a speech in Waikoloa, Hawaii, on Sept. 8.

Yellen said the Fed's efforts to pump cash into the banking system and ease the rate and terms on direct loans to banks have been ``helpful'' though not a ``panacea.''

Still, market turmoil sometimes has little effect on the economy, Yellen cautioned. In 1998, when forecasters feared the implications of a Russian debt default and the Fed lowered rates three times, ``growth turned out to be robust,'' she said.

In addition, recent data on manufacturing and capital-goods orders are ``upbeat,'' and business spending on equipment and software ``promises to be a bright spot,'' Yellen said.


``It appears that financing for capital spending for most firms remains readily available on terms that have been little affected by the recent financial turmoil,'' she said in her speech. ``Of course, the outlook for capital spending could worsen if business confidence were shaken.''

The end of the home-price boom may have helped spark the financial turmoil, she said in response to an audience question. ``Even before the events of recent weeks, it was clear that the housing market was weakening'' and ``had weakened substantially,'' Yellen said.

``It takes a long time before housing prices'' adjust, Yellen said, because home sellers are ``very loath to accept lower prices.''

On inflation, Yellen said she sees ``signs of improvement'' in price pressures from recent data. Unlike Lockhart, Yellen didn't express concern about ensuring a ``sustained'' moderation in inflation.

The Fed's preferred price gauge, which excludes food and energy costs, rose 1.9 percent from a year earlier in June and July, within the 1 percent to 2 percent comfort range stated by Yellen and several other officials.

Yellen, 61, hasn't dissented from a decision since becoming San Francisco Fed president in 2004, nor during her 1994-97 stint as a Fed governor in Washington. She was previously an economics professor at the University of California at Berkeley and also served as chairman of President Bill Clinton's Council of Economic Advisers.

Dallas Fed President Richard Fisher and Fed Governor Frederic Mishkin are also scheduled to speak today.

To contact the reporter on this story: Scott Lanman in Washington
Fed's Yellen: turmoil adds to risk for economy

Monday September 10, 1:29 pm ET

By Ros Krasny SAN FRANCISCO (Reuters) - San Francisco Federal Reserve Bank President Janet Yellen said on Monday that the current turmoil in financial markets has added "appreciably" to downside risks for the U.S. economy.

"Financial market turmoil seems likely to intensify the downturn in housing," and pose a risk to broader economy, especially consumer spending, Yellen said in a speech at the National Association of Business Economics annual meeting.

Still, Yellen said the goals of price stability and full employment must be the "unswerving focus" of policy-makers. "Monetary policy should not be used to shield investors from losses."

Yellen is not a voting member of the central bank's Federal Open Market Committee in 2007.

She said that declining home prices could hurt consumer spending, and that risks to economic growth would be "significant" if housing prices fall in the context of rising unemployment.

"The key point is that ... a drop in house prices is likely to restrain consumer spending to some extent," Yellen said.

The Fed's actions to shore up the credit markets so far have been "helpful" but not a panacea, Yellen said.

Ultimately, the bank must consider the role of lags in making any policy adjustment, she said. "It is critical to take a forward-looking approach."

Financial markets look for the FOMC to lower its target fed funds rate this month to 4.75 percent from 5.25 percent, where the rate has been since June 2006.

Yellen did not directly address the rate outlook, but referenced an updated FOMC statement made on Aug 17 that discussed increased risks to growth.

"This assessment apparently is similar to that of market participants," Yellen said, noting the decline in the implied fed funds rate shown in interest rate futures markets.

Yellen it was still possible that ultimately, the fallout from the credit market crisis could turn out to be small and that the market could be returning to more normal risk pricing.

"Keeping a cool head" is advisable, she said, while allowing that "the transition from one regime to another can be quite painful."

Yellen said that improvement in inflation pressures has been evident recently, and that core inflation was likely to edge down "slightly" in the next few years.

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