Fed's Yellen: Economy's Downside Risk Getting Worse

'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.