Fed Sends Mixed Messages About Economy

Is America heading for a recession or already in one? The Federal Reserve is sending mixed messages.

On Tuesday, following a steady stream of bad economic news and bold moves by the U.S. government to intervene, the head of the San Francisco branch of the Federal Reserve said the country has slipped into recession. But one day later, the chairman of the board made no such suggestions.

“The recent flow of economic data suggests that the economy was weaker than expected in the third quarter, probably showing essentially no growth at all,” Janet Yellen said in an address in Palo Alto, Calif., to the Financial Executives International's Silicon Valley chapter.

“Growth in the fourth quarter appears to be weaker yet, with an outright contraction quite likely,” Yellen said. “Indeed, the U.S. economy appears to be in a recession.”

But in a speech on Wednesday, Federal Reserve Chairman Ben Bernanke never used the “R” word, even as he warned that a quick economic recovery is not in the cards.

“Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning,” Bernanke said.

Even with a flurry of radical steps recently taken by the Fed, the U.S. government and others around the world, “credit markets will take some time to unfreeze,” he said.

A spokesman for the Fed declined to comment on Yellen’s statement. A spokeswoman for Yellen said she stands by her statement.

It is not unusual for Fed board governors to express differing views about the outlook of the economy, said Ralph Bryant, a senior fellow at the Brookings Institution and a former finance director at the Fed.

Because Bernanke is speaking on a national stage, he "has to be more cautious," Bryant said, adding that both Bernanke and Yellen are signaling how bad the economic outlook is.

Economists broadly define a recession as two consecutive quarters of negative growth, something that can be measured only after the fact. The official arbiter of when recessions begin is the National Bureau of Economic Research, which has not declared one yet.

The economy had been losing traction even before the financial crisis intensified last month. Fallout from the housing market’s collapse continues to be the primary source of weakness for the economy and for financial markets.

All the credit problems have led to employers cutting jobs and other investments. Nervous consumers have hunkered down. Slowdowns overseas are sapping export growth, which had been a key resource keeping the economy afloat.

Consumer prices — the costs of gasoline, food, clothes, medicine and other essentials — so far this year have risen at an annualized pace of 4.5 percent, faster than the 4.1 percent increase for all of 2007.

On Thursday, the Federal Reserve reported that industrial production at the nation’s factories, mines and utilities plunged 2.8 percent in September, on top of a 1 percent drop in August. September’s decline, mostly reflecting disruptions from Hurricanes Gustav and Ike, was the largest since December 1974, when industrial production fell 3.5 percent.

The latest showing on industrial activity was worse than economists expected. They were forecasting a decline of 0.8 percent.

There is one bright spot on the economy: Inflation last month came in flat, which means consumer prices are growing more slowly. The price of oil is now less than half of what it was at its high in the late spring.

The downside of the news: A drop in the inflation rate is symptomatic of a weakening economy.

FOX News' Stephen Clark and the Associated Press contributed to this report.