official conceded the
States
but suggested the central bank should wait to see if more rate cuts are needed.
“The economy has all but stalled and could contract
over the first half of the year,” San Francisco Federal Reserve President
Janet Yellen, who is not a voter on the policy-setting committee in 2008, said
on Thursday.
“Current indicators suggest that, starting in the
fourth quarter, the economy, at best, slowed to a crawl,” she said, adding
later that the Fed is still battling a “negative feedback loop” of
tight credit conditions, falling house prices and low consumer confidence.
Yellen’s remarks, in a speech to the Stanford Institute for
Economic Policy Research, echoed those from Fed Chairman Ben Bernanke during
testimony to a Congressional Joint Economic Committee on Wednesday.
“Recession is possible,” Bernanke said.
“There’s a chance that for the first half as a whole, there might be a
slight contraction.”
But, like Bernanke, Yellen declined to point the way toward
additional interest rate cuts to pull the economy out of its malaise.
Instead, she forecast a minor pickup in growth in the second
half on the back of rate cuts already in the pipeline, and “timely”
fiscal stimulus checks — even though the drag from falling house prices will
linger into 2009.
Yellen told reporters that she was “very
uncertain” on the outlook for interest rates, especially over the next few
Fed policy meetings.
WAGE-PRICE SPIRAL
Earlier on Thursday, Bernanke said the full benefit of the
Fed’s series of rate cuts has not yet been felt, given the lag between the
Fed’s actions and their impact on the economy that may reduce the need for many
more rate moves ahead.
“Further actions will have to depend on how the economy
evolves, and we are looking of course at both sides of our mandate, growth and
inflation,” Bernanke told a U.S. Senate Banking Committee hearing on the
rescue of troubled investment bank Bear Stearns.
Yellen said the Fed is mindful of heading off any chance of
a 1970s-style wage-price spiral by cutting rates too far at a time energy and
food prices are stubbornly high.
“ACCOMMODATIVE”
There is a risk that “our attempts to deal with
problems in the real economy could lead to higher inflation expectations and an
erosion of our credibility,” she said.
headline consumer inflation was 4 percent in February year-on-year.
The Fed has slashed its benchmark lending rate by 3
percentage points since mid-September, to 2.25%.
The funds rate is now “accommodative,” at a real,
or inflation-adjusted, level of zero or slightly above zero, Yellen said.
Some Fed watchers expect stiff opposition from inflation
hawks to pushing the funds rate to a negative real level given the threat of
inflation.
In March, Dallas Fed President Richard Fisher and
Philadelphia Fed President Charles Plosser voted against the Fed’s aggressive
75 basis point rate cut.
Bernanke also stressed on Thursday that the Fed was
uncomfortable with the current high levels of inflation, while arguing that
these pressures should abate in the months ahead.
“The primary reason for the high inflation is rapid
increases in the price of globally traded commodities, including crude oil and
food,” he said.
Speaking in
York
Frederic Mishkin said troubles in financial markets should not prompt the Fed
to let down its guard against inflation.
Mishkin conceded in a speech to the Princeton Club that
struggling credit markets have become a major drag on
growth. “This financial disruption has a very contractionary effect,”
he said.
