Yellen Says U.S. in a Recession, Interest Rates Will Stay Low

By Vivien Lou Chen

Oct. 15 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. is in a recession and policy makers' interest-rate stance is aimed at addressing the risks of a deeper downturn.

``Policy is appropriately focused, and decisively focused, on attempting to mitigate the dark scenario on the downside risk -- I believe and I hope that we'll be successful,'' Yellen, 62, said after a speech late yesterday in Palo Alto, California. Until the economy recovers ``the Fed will consider it appropriate to keep interest rates relatively low in order to stimulate the economy,'' she said.

The U.S. is already in a recession by most accounts, according to economists surveyed by Bloomberg News this month. Yellen's remarks yesterday echoed Fed Chairman Ben S. Bernanke, who said a week ago that the credit strains may take ``a heavy toll'' on the economy if left unchecked.

``Recent financial developments and economic data make it clear that the outlook for the U.S. economy has weakened noticeably,'' Yellen said in her speech to the Silicon Valley Chapter of Financial Executives International. ``The turmoil in global financial markets poses a serious and direct threat to the well-being of all citizens of the global economy.''

Finance chiefs and central bankers from the Group of Seven nations vowed in the past week to take ``all necessary steps'' to unfreeze markets, and the Bush administration is investing $250 billion in purchases of U.S. financial-company stocks.

`Critical Step'

The government's plan is ``a critical step toward financial stability,'' Yellen said. Adequate capital is ``a prerequisite for the restoration of confidence in the financial system.''

U.S. stocks on Oct. 13 staged the biggest rally in seven decades on the government's plan to buy stakes in banks and on a Fed-led push to flood the global financial system with dollars.

The moves came less than a week after the Fed, European Central Bank and four other central banks lowered interest rates through unprecedented coordinated action. The Fed cut its benchmark rate by half a percentage point, to 1.5 percent.

Traders in fed funds futures now place 92 percent odds of a further 25 basis point cut at the Federal Open Market Committee's next meeting on Oct. 28-29. That compares with no chance a month ago.

``Rate cuts are by no means a panacea, but they do at least partially offset the tightening of financial conditions,'' Yellen said. Borrowing rates ``in my view would be substantially higher absent the reduction in our base lending rate.''

Economists' Forecasts

The economy shrank at a 0.2 percent annual pace in the third quarter and will contract 0.8 percent in the last three months of 2008, according to the median estimate of more than 50 economists. The contraction would follow declines in the four monthly gauges the National Bureau of Economic Research also uses to determine recessions: payrolls, production, income and sales.

``The U.S. economy appears to be in a recession,'' Yellen said yesterday.

U.S. payrolls plunged by 159,000 in September, the most in five years. The unemployment rate was 6.1 percent, a climb of 1.4 percentage points from a year before.

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 doesn't vote on rates again until 2009.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net