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Fed official: Economy weak, but no recession

San Francisco Fed chief Yellen says an economic downturn, led by slump in the housing market, will continue through the end of 2008.

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The Fed faces a cutting dilemma
As disappointing economic numbers rattle Wall Street and recession looms, the Fed may cut rates again to stave off a downturn.

NEW YORK (CNNMoney.com) -- The United States will not get out of its economic slump any time soon, but might be able to avoid a recession, according to the head of the San Francisco Federal Reserve.

In a speech given late Thursday in Hawaii, Janet Yellen, the regional Fed president, said an economic downturn - led by a decline in the housing market - will remain with us for at least the remainder of 2008.

"I consider it most probable that the U.S. economy will experience slow growth, and not outright recession, in coming quarters," Yellen said.

She warned that economic prospects are uncertain and downside economic risks remain.

"Turbulence in financial markets is due to some fundamental problems that are not likely to be resolved quickly," Yellen said.

Consumer spending will fall even further, Yellen warned, as a continued decline in home prices reduces homeowners' wealth. She expects more delinquencies on consumer loans, and said continued volatility in the financial markets will also hamper Americans' willingness to spend.

But Yellen was positive about Congress' economic stimulus bill and relatively low inflation. She said that the tax rebate legislation, which was passed late Thursday, "could provide notable stimulus in the latter half of the year."

She was also upbeat about inflation, saying that with "appropriate monetary policy," inflation will soon drop below 2%, which she believes will be "consistent with price stability."

Some economists have expressed concern that the Federal Reserve's 2.25 percentage point reduction of the key interest rate since September will cause a rise in inflation. Yellen's belief that inflation will remain in check could indicate that the Fed will be willing to further cut rates this year.

But while Yellen is an influential Fed official, she does not currently sit on the rate-setting Federal Open Market Committee. To top of page

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