The market is still adjusting, the turmoil has not yet settled down ... It's still a fragile situation out there.

As reported by Bloomberg News

We will not experience anything remotely like that in the United States today ... We are certainly going to make sure that the financial system remains in good functioning order.

From Q&A as reported by Market News International and Reuters, on comparisons to the Great Depression

The U.S. economy will continue to suffer from a bout of anemia while the housing and financial markets settle down. I take comfort, however, in knowing that markets eventually clear if we at the Fed do our job and the other regulators and fiscal authorities do theirs. Even in the egocentric present, when gloomy analysts lament “unprecedented problems,” we must never lose faith in the economic machine that has propelled the U.S. economy to unprecedented prosperity.   

The housing crisis may not yet have run its course, and further danger could lie ahead both for the nation and also for Texas. We may seem isolated from the rest of the nation’s woes, but we are not immune from the dangers they pose. Still, as I survey the Texan economic landscape, I sense we have an opportunity here. Our economy is growing. We’re an affordable and wonderful place to live. And we hunger for workers—as recently as this morning I heard anecdotal reports of labor shortages in parts of Texas.

Until recently, the deflating housing bubble had not spilled over to the rest of the economy. But now it has. Based on monthly data that cover most of the first quarter, 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.

With respect to consumer spending, a long list of factors can be expected to have a depressing effect going forward.

With stimulus from monetary and fiscal policy, economic performance should improve in the second half of this year. Nonetheless, the economy is still likely to turn in a sluggish performance for the year as a whole. With the unemployment rate currently at 4.8 percent, it is still about in line with my estimate of its sustainable level. But the weak performance I expect this year is likely to push unemployment into a range indicating the presence of some slack.

Inflation tends to fall noticeably during recessions, and that provides a downside risk for my inflation forecast.

The Federal Reserve cannot, however, be complacent about inflation. Most survey measures of long-run inflation expectations have remained well behaved. But some measures of inflation compensation derived from the differential between nominal and real Treasury yields have moved up. Such measures are an imperfect indicator of inflation expectations, because they are affected by inflation risk and illiquidity. Nevertheless, these movements highlight the risk that our attempts to deal with problems in the real economy could lead to higher inflation expectations and an erosion of our credibility.

Overall, I expect PCE price inflation to fall below 2 percent next year based on futures markets’ expectations of a leveling out of energy and other commodity prices, and the projected weakening of labor and product markets.

With regard to monetary policy, the FOMC has taken significant steps since September, cutting the federal funds rate by 3 full percentage points to 2¼ percent. With core PCE price inflation running at around 2 percent, the real—inflation-adjusted—funds rate is at an accommodative level of around zero or slightly higher.

I consider such accommodation an appropriate response to the contractionary effects of the ongoing financial shock and the housing downturn, and I anticipate that the resulting stimulus, combined with that of the fiscal package, will foster a moderate pickup in growth later this year.

Looking ahead, it seems likely that the period of house price declines will not be over very soon, since some models of the fundamental value of houses suggest that prices are still too high, and futures markets for house prices indicate further declines this year.

It is important to recognize that a substantial adjustment, recognition of losses, and reduction in risk has already taken place. And a range of different prices of financial assets now reflect a very cautious view of the future. The severity of the pressures in markets evident over the last few months are in part a reflection of the speed and force with which markets and institutions in our financial system adapt to fundamental changes in the outlook. This capacity to adjust and adapt is one of the great strengths of our system. Nevertheless, we still face a number of challenges ahead. The seeds of this crisis took a long time to build up, and they will take some time to work through.

Asset price declines—triggered by concern about the outlook for economic performance—led to a reduction in the willingness to bear risk and to margin calls. Borrowers needed to sell assets to meet the calls; some highly leveraged firms were unable to meet their obligations and their counterparties responded by liquidating the collateral they held. This put downward pressure on asset prices and increased price volatility. Dealers raised margins further to compensate for heightened volatility and reduced liquidity. This, in turn, put more pressure on other leveraged investors. A self-reinforcing downward spiral of higher haircuts forced sales, lower prices, higher volatility and still lower prices.

This dynamic poses a number of risks to the functioning of the financial system. It reduces the effectiveness of monetary policy, as the widening in spreads and risk premia worked to offset part of the reduction in the fed funds rate. Contagion spreads, transmitting waves of distress to other markets ...

The most important risk is systemic: if this dynamic continues unabated, the result would be a greater probability of widespread insolvencies, severe and protracted damage to the financial system and, ultimately, to the economy as a whole. This is not theoretical risk, and it is not something that the market can solve on its own. It carries the risk of significant damage to economic activity. Absent a forceful policy response, the consequences would be lower incomes for working families, higher borrowing costs for housing, education, and the expenses of everyday life, lower value of retirement savings and rising unemployment.

Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse challenges. Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year. I remain confident in our economy’s long-term prospects.  

With respect to small business, I've heard mixed anecdotes about small business. Not all small community banks have had problems. Many of them were not involved in any way in the subprime lending, for example, and they haven't taken any losses, and so many of them are still making loans to local businesses.

But as a general matter, the loss of capital in the banking system, which has only been partially replenished; the increase in the size of the balance sheets as they brought off-balance-sheet assets onto their balance sheets; and their concerns about liquidity all are creating a situation where our financial institutions are hunkered down. They're not making loans at the normal rate.  And it's having real effects on small businesses, on mortgages, on all aspects of our economy.

From the Q&A session

A recession is possible. But a recession is a technical term defined by the National Bureau of Economic Research depending on data which will be available quite a while from now, so I'm not yet ready to say whether or not the U.S. economy will face such a situation.   

However, it's clearly a period of very slow growth, extending back to the fourth quarter of last year, and we are trying to set our policies appropriately for that situation.

From the Q&A session