2 Fed bank chiefs see weakening in economy

Two Federal Reserve bank presidents suggested that the U.S. economy is weakening after the labor market shrank in August and that the housing market shows no sign of recovery.

Janet Yellen, head of the San Francisco Fed, cited "significant downward pressure based on recent data indicating further weakening in the housing sector and the tightening of financial markets."

Atlanta Fed President Dennis Lockhart said employment began softening in June. He also declined to repeat remarks he made just four days ago that there weren't "conclusive" signs of a faltering economy.

Treasuries rallied as traders interpreted their remarks as signaling an interest-rate cut next week in order to preserve the six-year expansion.

Yellen's remarks are "a clear sign that she will be arguing for a rate cut," said Allen Sinai, president of New York-based Decision Economics. "There's not much to lose for the Fed in cutting rates on Sept. 18. There's potentially a lot to lose if they don't cut rates, in terms of the economy and the markets."

Separately, Dallas Fed President Richard Fisher said that he's "generally encouraged" about the state of the economy and that the August job losses represented an "occasional discordant note." Fed Governor Frederic Mishkin speaks later today.

Payrolls are one of the main indicators, along with sales, wages and production, which help determine the start of economic contractions.

"It is critical to take a forward-looking approach gauging the effects of recent developments on the outlook, and, importantly, the risks to that outlook," Yellen said in a speech to a conference in San Francisco. Declining home prices and rising unemployment may cause "significant" risks to consumer spending, she said.

Similar concerns are also being echoed in the private sector.

Over the weekend, Countrywide Financial Corps. Chief Executive Officer Angelo Mozilo, whose company plans to eliminate as many as 12,000 jobs, said, "The issues the economy is facing are worse than most people believe."

Mozilo said interest rate cuts by the U.S. Federal Reserve won't be enough to revive home sales and urged that Fannie Mae and Freddie Mac be allowed to finance bigger home loans, and limits for government mortgage insurance through the Federal Housing Administration should be raised, he said.

General Motors CEO Rick Wagoner does think cutting interest rates further can stave off a slowdown in the U.S. economy.