Fed's Yellen keeping an open mind on policy

By Ros Krasny

LOS ANGELES (Reuters) - San Francisco Federal Reserve Bank President Janet Yellen on Tuesday said she was on the fence about the interest rate outlook given the high level of uncertainty about the U.S. economy.

"I have a totally open mind about what, if anything, is going to be needed from here on in," Yellen told reporters after a speech to a Town Hall-Los Angeles public affairs forum.

Yellen said the Fed's aggressive one-half percentage point interest rate cut in September, which took the fed funds target to 4.75 percent, had helped limit downside risks but it is too early to say that the rate cut means the economy has "dodged a bullet," she said.

"Any forecast and any analysis of events should be made with a great deal of humility," Yellen said, adding that fallout on the economy and on markets from the credit crunch that descended in August is most likely not over.

The U.S. economy turned in a reasonably good performance in the third quarter, helped by robust personal spending, but effects of recent financial turmoil are more likely to show up in fourth-quarter data, she said.

Housing remains a sore spot, with many indicators pointing downward even before the financial turmoil began, Yellen said.

Given the bulging inventories of unsold new homes, "further price declines may be needed to bring housing markets into balance," which coupled with higher mortgage interest rates could still crimp consumption.

Yellen, the Fed's 12th District president, said the central bank was not engaging in "moral hazard" with its rate cut by possibly shielding speculators from losses.

"Investors who misjudged risks will surely suffer losses even if monetary policy is successful in keeping the economy on track. ... I don't believe that the Fed should stand aside as a financial shock threatens to derail the economy."

Yellen is not a voting member of the policy-setting Federal Open Market Committee in 2007.

INFLATION ABATING

Yellen said inflation pressures had improved to the point where a rate cut might have been possible even without the recent financial turmoil, because lower inflation had pushed up the "real" fed funds rate.

Interest rates were "moderately restrictive" ahead of the Fed's September 18 rate cut, its first in four years, she said.

After a significant decline in the core personal consumption expenditures (PCE) price index this year, "inflation is closer to where we would like it to be" and could edge down more over the next few years, she said.

Yellen forecast some slack emerging in the labor market, where the U.S. jobless rate has started to climb back from unusually low levels.