Fed officials play down rate cut expectations

By Ros Krasny

PALO ALTO, California (Reuters) - For the second time this week, a senior Federal Reserve official conceded the United States economy could slip into recession, but suggested the central bank should wait to see if more rate cuts are needed.

"The economy has all but stalled and could contract over the first half of the year," San Francisco Federal Reserve President Janet Yellen, who is not a voter on the policy-setting committee in 2008, said on Thursday.

"Current indicators suggest that, starting in the fourth quarter, the economy, at best, slowed to a crawl," she said, adding later that the Fed is still battling a "negative feedback loop" of tight credit conditions, falling house prices and low consumer confidence.

Yellen's remarks, in a speech to the Stanford Institute for Economic Policy Research, echoed those from Fed Chairman Ben Bernanke during testimony to a Congressional Joint Economic Committee on Wednesday.

"Recession is possible," Bernanke said. "There's a chance that for the first half as a whole, there might be a slight contraction."

But, like Bernanke, Yellen declined to point the way toward additional interest rate cuts to pull the economy out of its malaise.

Instead, she forecast a minor pickup in growth in the second half on the back of rate cuts already in the pipeline, and "timely" fiscal stimulus checks -- even though the drag from falling house prices will linger into 2009.

Yellen told reporters that she was "very uncertain" on the outlook for interest rates, especially over the next few Fed policy meetings.

WAGE-PRICE SPIRAL

Earlier on Thursday, Bernanke said the full benefit of the Fed's series of rate cuts has not yet been felt, given the lag between the Fed's actions and their impact on the economy that may reduce the need for many more rate moves ahead.

"Further actions will have to depend on how the economy evolves, and we are looking of course at both sides of our mandate, growth and inflation," Bernanke told a U.S. Senate Banking Committee hearing on the rescue of troubled investment bank Bear Stearns.

Yellen said the Fed is mindful of heading off any chance of a 1970s-style wage-price spiral by cutting rates too far at a time energy and food prices are stubbornly high.

"ACCOMMODATIVE"

There is a risk that "our attempts to deal with problems in the real economy could lead to higher inflation expectations and an erosion of our credibility," she said.

U.S. headline consumer inflation was 4 percent in February year-on-year.