The Wall Street Journal-20080213-Fed-s Yellen Sees a -Significant Threat- To Economy- Rejects Talk of Tightening

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Fed's Yellen Sees a 'Significant Threat' To Economy, Rejects Talk of Tightening

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The nation's economy still faces a "significant threat," making it too early to start talking about ending the Federal Reserve's accommodative stance on interest rates, according to a Fed official.

"The threat hasn't passed. We need to remain very focused on the downside risks to the economy," Janet Yellen, president of the Federal Reserve Bank of San Francisco, told reporters after speaking to the San Francisco Planning and Urban Research Association yesterday. Still, she said, when the time comes, the Fed will have to move in a "timely way" to remove the monetary stimulus to prevent inflationary pressures.

Earlier, she told the association that the Fed, along with other regulators and market participants, has plenty of soul searching to do as it pieces together what went wrong with the U.S. market for risky, or subprime, mortgages.

The Fed itself isn't entirely free from blame, she said, and will have to examine the "trade-offs" between allowing the market to function and protecting people from abuses.

She noted, for example, that even though there's a "horrendous" delinquency rate of about 20% on subprime mortgages, the remaining 80% of those loans have helped people who would have otherwise been ineligible to receive a home loan.

The Fed doesn't want its recent interest-rate cuts to be perceived as bailing out markets, Ms. Yellen said, adding that people are taking losses on bad bets, and it's "ridiculous" to suggest otherwise. At the same time, the Fed's focus has to be on the economy and on the innocent bystanders who weren't involved in the credit-market chaos but have been hurt by the fallout, she said.

Ms. Yellen said she still expects a slowdown of economic growth rather than a recession, but is waiting for more data.