Fed officials see recession in all but name

San Francisco Federal Reserve Bank President Janet Yellen said economic prospects are “unusually uncertain,” with growth “at best” at a crawl. “The economy has all but stalled and could even contract over the first half of the year,” Yellen said in a speech to the Bay Area Council’s economic outlook conference. “I’m not ruling out a recession,” she told reporters later. The ultimate designation of a recession  -- two straight quarters of negative growth -- is mostly a technicality, Yellen said. Across the country, Charles Plosser, president of the Philadelphia Federal Reserve Bank, said the economy “feels pretty bad,” regardless of whether a recession is declared. Growth prospects are weak, and the slowdown will have consequences for everything from jobs to production, Plosser told reporters after a speech in Blue Bell, Pennsylvania, north of Philadelphia.

The downbeat comments echoed those from the Fed’s Beige Book assessment of economic conditions between March 5 and April 7, released on Wednesday. The Beige Book said economic conditions were worsening across much of the nation even while food, fuel and raw material prices are increasing. The dreaded “R” word -- recession -- was mentioned for the first time in years, quoting one Boston district contact as saying a recession “probably started in December” for retailers. “The Beige Book either portrayed a slowdown in already sub-par economic conditions, or a deepening recession,” said Michael Gregory, senior economist at BMO Capital Markets in Toronto. Also on Wednesday, Federal Reserve Governor Frederic Mishkin told a Senate panel that small businesses, a major generator of jobs in the US economy, will find it harder and more costly to borrow money as financial market turmoil persists.

 
INFLATION A PROBLEM
Plosser and Yellen, who sit at opposite ends of the Fed’s ideological spectrum, both restated their concern about inflation, which is running high enough for some Fed watchers to suspect the central bank will go slow on any additional interest rate cuts. Mishkin on Wednesday told the Senate Small Business committee that the Fed could lower rates further if needed. “Clearly you can’t get interest rates below zero ... but we actually have interest rates now at 2-1/4% and clearly there is some room to lower them if it’s needed,” Mishkin said. Plosser, who last month voted against the move by the policy-setting Federal Open Market Committee to cut the benchmark federal funds rate by three-fourths of a percentage point, said, “Inflation is a concern, I’ve been saying that for some time.”

Dallas Fed President Richard Fisher also voted against the cut, a rare double dissent. Yellen, who is not an FOMC voting member this year, said the slowing economy will serve as a brake on inflation over time, and looked for core prices to return to a 2% pace of annual increase over the next years. Still, she said the Fed must be careful not to lower rates more than needed in the current easing cycle, saying, “Inflation is a problem.” Although core inflation has stabilized in the past two months, Yellen said price stability cannot be achieved unless headline price pressures, which include food and energy, subside as well. “The Fed cares about total inflation,” she said.

The headline consumer price index rose by 0.3% in March for a year-on-year advance of 4%, according to data released on Wednesday. The Fed’s focus on core inflation assumes that food and energy prices will not keep rising relentlessly, Yellen said. Plosser termed crude oil prices, which traded above $115 per barrel for the first time on Wednesday, "extraordinarilyhigh."

 
MISSION NOT YET ACCOMPLISHED
Speaking aboard the aircraft carrier USS Hornet, Yellen was far from declaring “mission accomplished” for the Fed’s efforts to shield the economy from turmoil related to the collapse of the subprime mortgage market and decline in housing prices. Still, she said the FOMC had taken “significant steps” since September in pushing the federal funds rate down to 2.25% from 5.25%, and that monetary and fiscal stimulus should boost the economy in the H2. The FOMC meets on April 29-30 to consider its next move on interest rates. Financial markets anticipate a one-quarter percentage point cut in the federal funds rate, to 2%. Earlier this month bets were divided between a one-quarter-point ease and a bolder, half-point cut.

Yellen told reporters that the shift in market expectations probably reflected the view that financial conditions have stabilized somewhat since the last FOMC meeting in March. Mishkin told the Senate Small Business Committee the Fed is taking steps beyond movements in lending rates. The Fed is “continually looking at steps to make the markets function better” and has been “quite creative in terms of the steps we’ve taken so far,” he said. (Reuters)