Federal Reserve Bank of San Francisco President Janet Yellen said on Monday that worsening financial conditions and weaker-than-expected economic data have raised downside risks to the economic outlook.
"Since the October FOMC meeting, financial conditions have deteriorated, and we have seen some unexpected softening in the economic data," she said in a speech to business leaders in Seattle on the U.S. outlook and monetary policy.
"These developments necessitate some rethinking of my growth forecast, and have highlighted the downside skew in the risks to that forecast."
On inflation, Yellen said consumer prices were expected to rise broadly in line with price stability, although there were some "notable upside risks" such as higher labor costs, a weaker dollar and rising energy prices.
She added that more economic data to be released ahead of the Fed's rate-setting committee's meeting on Dec. 11 would have to be incorporated into the outlook.
Yellen is not a voting member this year on the Fed's rate-setting committee.
The Fed has cut benchmark interest rates by 75 basis points since mid-September. Markets widely expect another rate cut next week.
Economic growth for the last three months of the year will likely be sluggish, Yellen said, and growth may come in weaker than she had previously anticipated over the next few quarters due to the possible adverse effects of financial turmoil.
"Very Meager Growth"
'Very Meager Growth'
"The fourth quarter is sizing up to show only very meager growth," she told the Seattle Community Development Roundtable and the Seattle Chamber of Commerce Board of Trustees.
While that probably reflects some 'payback' from strong growth earlier this year, it also may reflect some impact of the financial turmoil, she said.
"If so, a more prolonged period of sluggishness in demand seems more likely," she said.
While an "all-out credit crunch" has not emerged yet, tighter lending conditions as lenders worry about the economic outlook may hurt households and businesses, she said.
"It is far too early to tell if we are in for a sustained period of sluggish growth in consumption spending, but recent developments do raise this possibility as a serious risk to the forecast," she said.
But not all the data was negative, the San Francisco Fed chief said.
The labor market remained fairly robust, and business investment was also fairly strong, though recent data suggested some deceleration, she said.
The weakening of the U.S. dollar had improved the massive U.S. trade deficit and offset some of the effects of tighter credit conditions and lower equity prices, although a weaker dollar also lowers the purchasing power of American consumers, she said.
Yellen projected real economic growth to return to around 2-1/2 percent trend over the next year, and unemployment rising only gradually to just above 4-3/4 percent.
Core inflation, as measured by the price index for personal consumption expenditures, will edge down to around 1-3/4 percent over the next few years, and the gap between total and core PCE inflation will diminish substantially, she said.