Fed’s Yellen signals support for rate cut

Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, said Monday that financial conditions and consumer spending had deteriorated more than she had expected in the last month. Her remarks signaled that she would support cutting interest rates next week.

“The turmoil in financial markets has not subsided as much as I had hoped, and some data on personal consumption have come in weaker than expected,” Yellen said in a speech in Seattle. “These developments necessitate some rethinking of my growth forecast, and have highlighted the downside skew in the risks to that forecast.”

Yellen’s remarks buttressed those made by Fed Chairman Ben S. Bernanke and Vice Chairman Donald L. Kohn last week, which stoked investors’ expectations for lower rates. Bernanke and Kohn said reduced access to credit might threaten spending and policymakers must be flexible given greater-than-usual economic uncertainty.

Fed officials will see reports on factory orders, mortgage delinquencies, payrolls and consumer confidence before they gather a week from today. “We have more data to go that’s of importance,” Yellen said in response to a question.

Nonetheless, she said, “recent data on personal consumption expenditures and retail sales are not that encouraging.”

The central bank cut its benchmark federal funds rate by half a point Sept. 18 and a quarter of a point, to the current 4.5%, on Oct. 31. After that meeting, Fed officials indicated that they might not cut rates this month.

Now, interest rate futures prices indicate a 38% probability that policymakers will cut the benchmark rate by half a percentage point next week, to 4%.

The San Francisco Fed president said she had begun to hear “a pattern of negative comments and stories” from business contacts in her district, which includes California and accounts for about one-fifth of the U.S. economy. And recent reports signal “improvement in underlying inflationary pressures,” she said.

In addition, Yellen said “indications of heightened risk aversion continue to abound both here and abroad.” Still, she said, “we do not appear to be at the point of an all-out credit crunch as we were in the early 1990s.”

A former head of President Clinton’s Council of Economic Advisors, Yellen served as a Fed governor in Washington. Though she doesn’t currently have a vote on movements in the federal funds rate, her voice is considered important.

“Yellen is one of the consensus builders” at the Fed, a fact that suggests that rate setters next week will focus more on risks to economic growth than on inflation risks, said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

At its Oct. 31 meeting, the Fed said risks between inflation and growth were roughly balanced.