Fed, Gov't Officials Warn of Economic Slowdown

A Federal Reserve official and a state secretary warned Thursday the slowdown in the U.S. economy was quickening, because of weak housing prices, falling stock prices and rising energy costs.

Cleveland Federal Reserve Bank President Sandra Pianalto said the U.S. economy has shifted to a lower growth track given restraints led by weak housing prices and falling equities prices.

"The residential real estate market still appears to be in freefall," Pianalto said in remarks to the Association for Corporate Growth, her first comments on the economy in three months.

"We are also seeing a related slowing in consumer spending, perhaps in response to reduced household wealth. Tightened credit market conditions could also hinder economic growth this year for both businesses and consumers," she said.

Pianalto said the U.S. economy should gain traction later this year and into 2009, but added she was concerned about the downside risks to that outlook.

Even as the economy falters, there is a risk that the public's confidence in the Federal Reserve's commitment to price stability will be shaken, Pianalto said.

Part of the recent rise in energy prices were passing through to core inflation, and the falling dollar seems to have boosted import prices, she said.

Still, "I continue to believe that the economy's inflation trend will move lower over the forecast horizon as the growth rate of the economy slows and the influence of energy and import prices diminishes," she added.

Pianalto is a voting member of the Federal Open Market Committee in 2008.

The FOMC meets to discuss its next move on interest rates on Jan. 29-30, and is widely expected to lower benchmark rates by one-half basis point, to 3.75 percent.

Echoing recent comments by Fed Chairman Ben Bernanke, Pianalto said the current "fluid" economic and financial environment created the need for policy-makers to be "highly flexible."

Bodman Speaks about Recession

Meanwhile, U.S. Energy Secretary Sam Bodman said the probability of a U.S. economic recession is growing and high oil prices pose a significant problem for the world's largest energy consumer.

Bodman said global oil supplies were not as high as the U.S. would like but he stopped short of echoing President George W. Bush's call for OPEC to boost supply earlier this week.

"There are certainly signs that we are facing economic challenges and I think that the probability of a recession is now greater than it has been in the past," Bodman told reporters in Jordan on the first leg of a trip to the Middle East.

"In my view, there is some evidence that suggests that supplies are less than we would like to see," Bodman said.

On a seperate trip to the Middle East this week, Bush urged the Organization of the Petroleum Exporting Countries to increase output at its Feb. 1 meeting to help tame soaring oil prices and ease the threat of high energy costs on the economy.

Bodman said OPEC's supply levels were a matter for the producer group to decide, but that the potential damage to the economy of high prices made a case for an output boost.

"There is a case for higher oil prices being encouraged by the fundamental supply and demand situation and these challenges certainly pose a significant problem for the United States, and have even greater consequences for developing countries like Jordan, seeing the burden of high oil prices. That is the case for increased supply."

Bodman said he will encourage energy ministers that he meets in his visit to the Middle East to keep markets well supplied.