|
Fed sees significant credit pressure on economy { August 2007 } Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAO4erzDZQX8&refer=homehttp://www.bloomberg.com/apps/news?pid=20601087&sid=aAO4erzDZQX8&refer=home
Yellen Sees `Significant' Pressure on U.S. Economy (Update1)
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.
Financing
``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.''
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.
Last Updated: September 10, 2007 11:41 EDT
|
|
