BERKELEY, California - October 30, 2008 - Recent
trends in the U.S. economy are deeply worrisome at a time damage from the
credit crunch has outpaced the Federal Reserve's huge interest rate cuts, a top
Fed policy-maker said on Thursday.
Janet Yellen, president of the San Francisco Fed, was the first Fed official to speak after Thursday's news that the U.S. economy contracted in the third quarter, and she suggested the worst was yet to come.
"For the fourth quarter, it appears likely that the economy is contracting significantly," Yellen told a university housing symposium in Berkeley, California. "The mortgage meltdown is far from over (and) the economy and financial markets are still reeling from it."
Most private-sector borrowing rates are higher now than at the start of the financial crisis in August 2007, despite "some of the most momentous steps in decades" from the Federal Reserve Board, she noted.
"I don't mean to imply that the rate cuts did no good; borrowing rates in my view would be substantially higher absent the reduction in our base lending rate," said Yellen, who is not a voting member of the Federal Open Market Committee in 2008 but will vote in 2009.
Yellen has warned for months about a vicious cycle between reduced credit availability, weakened financial institutions and the broader economy, and said that "adverse feedback loop" is now in full swing.
"A greatly reduced flow of credit in the economy ... is the major factor responsible for the economic downturn that now is underway," she said.
For consumers, though, the credit problem is just one of several negative factors now at work, including a 9-month streak of lower monthly payroll employment, flat personal incomes and lower stock markets and housing values.
"The bottom is not yet in sight" for falling house prices or housing starts, said Yellen. "By mitigating foreclosure sales at fire-sale prices, these programs may also support housing prices more generally and serve to limit the credit losses that have done so much damage to the financial system," she said.