Fed official can see interest rates close to zero

By Vivien Lou Chen
Bloomberg News
Thursday, October 30, 2008

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.VDZUEW6e2M&refer=home

SAN FRANCISCO -- Federal Reserve Bank of San Francisco President Janet Yellen said the central bank may cut the benchmark interest rate close to zero percent from the current 1 percent level should the economy remain weak.

"We would do it because we are concerned about weakness in the economy," Yellen said today after a speech, responding to an audience question about the impact on the economy should the Fed reduce the main rate to as low as zero. "I think we could, potentially, go a little bit lower than" 1 percent, she said in Berkeley, California.

Recent data on the U.S. economy is "deeply worrisome" and the government should consider new ways to help homeowners and stem foreclosures, Yellen said in the speech.

The central bank cut the benchmark interest rate yesterday for the sixth time this year, seeking to avert what may be the worst recession in a quarter century. U.S. consumer confidence fell this month to a record low and the government reported today that the economy shrank at a 0.3 percent annual pace in the third quarter for its biggest decline since 2001.

"Clearly, we have a long way to go before the credit crunch shows significant healing," she said. "We are in the grip of an adverse feedback loop," in which tighter credit conditions are exacerbating economic weakness.

In the current quarter "it appears likely that the economy is contracting significantly" and "inflation risks have diminished greatly," she said.

Yellen is the first Fed official to speak since the decision by the central bank to reduce the main rate by half a percentage point to 1 percent, matching a half-century low. Fed Chairman Ben S. Bernanke is set to speak, via satellite, to the same group tomorrow.

"The reason to lower rates, and to lower them promptly and aggressively, as I think the Fed has done, is to get ahead of the curve" and support the economy "against the kind of weakness that Japan has experienced for over a decade," she said in response to an audience question.

The Conference Board's confidence index decreased in October to 38, the lowest reading since monthly records began in 1967, the New York-based research group said two days ago.

"The effects of the growing credit crunch have outpaced the easing of policy, and, indeed, every major sector in the economy has been adversely affected by it," Yellen said.

Home prices in 20 U.S. cities fell 16.6 percent in August from a year earlier, and have dropped every month since January 2007, the S&P/Case-Shiller home-price index also showed this week.

"Unfortunately, this is another case where the bottom is not yet in sight," Yellen said of home prices, adding that "direct assistance to homeowners and the housing market are worthy of serious consideration."

With the dollar appreciating against other currencies, "exports will not provide as much of an impetus to growth as they did earlier in the year," the bank president said.

Yellen, who has been the San Francisco Fed's president since June 2004, is a former Fed governor and ex-chairman of President Bill Clinton's Council of Economic Advisers. She votes on rates again next year.

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