May 5, 2009. BERKELEY, Calif. (Dow Jones)--The end of the recession is in sight, although the recovery could prove long and slow, the San Francisco Federal Reserve Bank's top official said Tuesday. ...
Yellen said she's more concerned about lower inflation and deflation, than about runaway inflation when the economy recovers. She said she expects inflation to fall below last year's 2% level, to as low as 1.5% in 2009 and possibly lower in 2010.
"If deflation were to occur with the funds rate near zero, the effects could be severe," Yellen said. But she added that she doesn't expect a "deflation problem."
Meanwhile, Yellen discounted fears that inflation could accelerate once the credit markets ease and the economy picks up steam. The Federal Reserve "is well aware" of the need to tighten its stance on monetary policy when the economy recovers and "is readying the tools even now," she said.
The prevailing fear is that overly weak economic activity will lead to deflation, but some worry the Fed's extraordinary interventions could fuel a future inflation boom.
A potential tool the Fed could use to tighten monetary policy while also supporting financial markets would be to issue interest-bearing debt broadly to private investors, Yellen said. Such debt issuances would have to be authorized by Congress, but it's a common tool used by other central banks, she said.
Yellen noted that the Fed's efforts to ease financial conditions and lower interest rates appeared to be working, and that positive effects from the billions of dollars in federal aid included in the stimulus package will likely be felt this quarter.
