Futures drop on recession fear; MBIA slides

By Ellis Mnyandu

Concerns about bond insurers remained after Moody's Investors Services cut its "AAA" ratings for XL Capital Assurance, a unit of Security Capital Assurance .

San Francisco Federal Reserve Bank President Janet Yellen, speaking in Honolulu, indicated a willingness to cut U.S. interest rates further, but she also said she was not confident a recession can be avoided this year.

"Every time we try to rally, one of these Fed governors comes out and opens their mouth and knocks the steam out of the market. I wish they would all just shut up," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

S&P 500 futures fell 8 points and were below fair value, a mathematical formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract.

Speaking to reporters Yellen, who is not a voting member of the policy-setting Federal Open Market Committee in 2008, said an extended spell of slow economic growth was the most likely outcome, but that a recession -- two consecutive quarters of contraction by the economy -- was within the range of forecasting error.

On the economic calendar is a report on December wholesale inventories due at 10 a.m. EST.

(Editing by Kenneth Barry)