Looks Like the Fed is Finally Admitting That They are Worried

It is understandable that Fed cannot come out and state that it is time to head for the exits, it is better if they let it slide out over time. Given the markets propensity to panic, the Fed letting their beliefs out slowly is probably a good thing. Text in bold is my emphasis. From Market Watch:

San Francisco Fed President Janet Yellen said Monday that developments since the last rate policy meeting in October suggest a bigger slowdown than she has expected.

Yellen became the third top Fed official to suggest in the past week that further interest rate cuts might be advisable at the FOMC meeting on Dec. 11. It appears that any Fed officials arguing for holding policy steady are going to face tough sledding.

Last week, Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn gave similar remarks suggesting that the financial turmoil in credit markets in recent weeks has raised the downside risks to growth in the next few quarters.

In her remarks, Yellen raised a red flag about consumer spending, suggesting that the long-awaited never-arrived slowdown in shopping may have arrived.

"It is far too early to tell if we are in for a sustained period of sluggish growth in consumption spending, but recent developments do raise the possibility as a serious risk to the outlook," Yellen said in a speech to a business group in Seattle on Monday.

"Recent data on personal consumption expenditures and retail sales are not that encouraging," she said. "They have begun to show a significant deceleration -- more than was expected -- and consumer confidence has plummeted."

Although there were also risks to the inflation outlook, Yellen said there are "signs of improvement in underlying inflationary pressures and core inflation should trend lower in coming years."

But it was the risks to the outlook that captured her attention. She reminded her audience that there is the possibility that "economic downturns can be difficult to reverse once they take hold."

"Since the October FOMC meeting, financial conditions have deteriorated, and we have seen some unexpected softening in the economic data," she said.

"For the next few quarters, there are signs that growth may come in somewhat lower than I had previously thought likely," Yellen said.

Yellen said it looks to her that the impact of the financial market turmoil that began in late July and August is beginning to slow the economy.

If this supposition proves correct, "a more prolonged period of sluggishness in demand seems more likely," she said.

Already, the fourth-quarter growth "is sizing up to show only very meager growth," Yellen said.
Nervousness by some banks about their capital may restrict lending terms and availability of credit, Yellen said.

"As yet, we do not appear to be at the point of an all-out credit crunch as we were in the early 1990s," she said.

Yellen said the renewed market turmoil over the past few weeks was a surprise. She said she expected a gradual recovery in credit conditions.

"At present, the ongoing turmoil in financial markets plays a crucial role" in the economic outlook, she said.

As a result, the outlook for housing has actually worsened, she said. Fundamental factors suggest that home prices have further to fall before the market finds its balance.

Yellen said not everything was bleak. She said the labor market has remained fairly robust and that further job growth was critical.