Monday, September 10, 2007

The Fed’s Yellen States That the US Economy Faces Increased Risk of a Slowdown

The San Francisco Fed President, Janet Yellen, stated recently that the economy faces higher risk of a significant slowdown. I found her comments interesting because the Fed is now beginning to get the message out that things may not be as rosy as previously thought. The excerpts below come from a Market Watch article or you can read her original speech at the NABE (National Association of Business Economists). The entire speech is worth a read because Yellen goes into the recent history of the capital markets and how these are effecting the economy.

The U.S. economy faces increased risks of a significant slowdown from a worsening housing sector and tight financial markets, San Francisco Fed President Janet Yellen said Monday.
"To sum up the story on the outlook for aggregate demand, I see significant downward pressure based on recent data indicating further weakening in the housing sector and the tightening of financial markets," Yellen told a group of business economists in San Francisco.

She noted that conditions in financial markets could change quickly, for the better or worse, "so it's hard now to speak with a great deal of confidence about future economic developments," she said. However, Yellen also warned that illiquid credit markets threaten to make the housing downturn worse, which in turn could hurt consumer spending.

"Financial market turmoil seems likely to intensify the downturn in housing," she said.
Yellen was hopeful that the turbulence in the financial markerts could be contained to Wall Street and not hurt Main Street. "Financing for capital spending for most firms remains readily available," she said. She noted that other periods of financial market upheaval, particularly the 1998 Russian default, have been resolved without much impact on the economy.

"A big issue is whether developments in the relatively small housing sector will spread to the large consumption sector, perhaps through declines in house prices," Yellen said. "Should the decline in house prices occur in the context of rising unemployment, the risks could be significant." (my emphasis)

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