By Michael S. Derby
NEW YORK (Dow Jones) A top Federal Reserve official said Tuesday the economy’s likely course of recovery means the central bank will not soon confront any imminent pressure to raise interest rates.

“We face an economy with substantial slack, prospects for only moderate growth, and low and declining inflation,” Federal Reserve Bank of San Francisco President Janet Yellen said.

“At some point, of course, we will have to tighten policy” and “we certainly have the means and the will to do so,” the official said. But “until that time comes … we need to provide the monetary accommodation necessary to spur job creation and prevent inflation from falling any further below rates that are consistent with price stability.”

Yellen, who is a voting member of the interest-rate setting Federal Open Market Committee, spoke Tuesday in the text of a speech prepared for delivery before Phoenix Chapter of Lambda Alpha International in Phoenix, Ariz. The FOMC meet last week in a gathering that kept interest rates steady at a 0% to 0.25% range. The Fed also said that policy was expected to stay in place for an “extended period” as the economy continues to work its way out of the worst economic downturn in generations.

While some Fed officials have recently become more inclined to move toward higher rates as the recovery moves forward, Yellen has not joined that hawkish tilt. Instead, her worries about the recovery and a lack of price pressures have caused her to argue in favor of continued Fed stimulus. Her speech Tuesday largely reaffirmed that outlook.

“The more significant threat to price stability over the next several years stems from enormous slack in the economy that is pushing inflation lower,” Yellen said. She described inflation expectations as “well anchored” and reflective of public confidence in the Fed’s commitment to keeping prices pressures contained.

Yellen warned “with slack likely to persist for years and wages barely rising, it seems probable that core inflation will move even lower over the next few years.”

But even as Yellen fretted over what she sees as continued downward pressures on already low inflation, she was more upbeat about the economy.

“The economy’s return to growth after a year and a half of recession marks a major turn and it looks like more than a flash in the pan,” Yellen said. “It seems to me that the economy has entered a sustained period of expansion,” and while the recession does not yet have an official end, “a wide array of data suggests that the corner has been turned,” she said.

“A number of factors bode well for the future, including a better functioning financial system, low mortgage interest rates, a resurgent stock market, a stabilization of house prices, and stronger growth abroad,” Yellen said.

That said, the recovery “is likely to be gradual and remain vulnerable to shocks,” Yellen said. She referred to what the recovery’s course might look like when plotted on a graph. What she expects is akin to an economy that loses ground sharply, with only a slow recovery that struggles to cover what was lost: “If I were to describe it, it would look something like an “L” with a gradual upward tilt of the base.

“Unfortunately, my own forecast envisions a less-than-robust recovery,” the official said.

Yellen noted “households have been pummeled and prospects for consumer spending are cloudy.

“It’s particularly sobering that labor markets continue to deteriorate badly” and “unemployment could well stay high for several years to come,” the central banker said.

There are big challenges before the economy. “With such enormous reservoirs of slack in the form of high unemployment and idle productive capacity, we need a strong rebound to put unemployed people back to work and get underutilized factories, offices and stores humming again,” Yellen said.

The official also said “the outlook for the residential market is uncertain,” adding “the outlook for housing has turned up in response to favorable mortgage rates, lower house prices, and a lower overhang of unsold houses.” But the uncertainty around housing is better than what’s being seen in commercial real estate, where conditions “clearly are weak.”

Yellen said “all indications are that commercial real-estate will continue weighing down the recovery going forward.”

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