Fed Officials Warn of Recession Risk

A pair of top Federal Reserve officials on Tuesday highlighted risks to the U.S. economy from the global credit crisis and liquidity squeeze, but did not hint at more interest rate cuts as a solution.

Janet Yellen, President of the San Francisco Fed, was especially blunt, saying the U.S. economy appeared to be in a recession and would likely contract in the fourth quarter after near-flat growth in the third.

“The outlook for the U.S. economy has weakened noticeably,” Yellen said in a speech to the Financial Executives International’s Silicon Valley chapter in Palo Alto, California.

“Virtually every major sector of the economy has been hit by the financial shock.”

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Yellen said while she “strongly supported” last week’s coordinated global rate cut to shore up a teetering world economy, rate cuts were not a cure-all.

“Rate cuts are by no means a panacea, but they do at least partially offset the tightening of financial conditions due to higher spreads, reflecting heightened credit and liquidity risk and a marked increase in general risk aversion,” she said.

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