Fed's Yellen says economy "all but stalled"

By Ros Krasny

PALO ALTO, California (Reuters) - The U.S. economy has "all but stalled and could contract" in the first half of 2008, but the interest rate outlook is clouded, San Francisco Federal Reserve President Janet Yellen said on Thursday.

Her comments reflected those of Ben Bernanke, the chairman of the Federal Reserve, who told a Congressional committee on Wednesday that the U.S. economy may contract in the first half of this year.

"Economic prospects remain unusually uncertain, and the downside risks to growth are significant," Yellen said in remarks prepared for an outlook presentation to the Stanford Institute for Economic Policy Research.

"It appears that growth in consumption and business investment spending has slowed markedly after years of robust performance, and, as a result, the economy has all but stalled and could contract over the first half of the year."

Given the risks, Yellen said the Federal Open Market Committee must be "prepared to act in a timely manner to promote a return of the economy to a sustainable path."

The remark hinted that Yellen might favor additional cuts to the federal funds rate, the Fed's main monetary policy tool. Yellen is not a voter on the policy-setting FOMC in 2008.

While prepared to act, Yellen told reporters that she was "very uncertain" on the outlook for interest rates, and that future policy moves would be determined by the evolution of the economy.

"I am very uncertain about what will happen with the fed funds rate going forward ... I have a very open mind on the subject," Yellen said.