We were just treated to some hawkish comments on the economy by Atlanta Fed President Dennis Lockhart, but San Francisco Fed President Janet Yellen decided to weigh in on the economy as well. Earlier this morning, Yellen told a group in San Francisco that she saw significant downside pressure on aggregate demand. Yellen did note that the conditions in the financial market can change quickly, but she warned that illiquid credit markets threaten to make the housing downturn worse. In turn, consumer spending could be hurt by a downturn in housing . . . it's a vicious cycle, really.

Yellen also noted, a big issue is whether developments in the relatively small housing sector will spread to the large consumption sector, perhaps through declines in house prices. Should the decline in house prices occur in the context of rising unemployment, the risks could be significant.