Fed's Yellen says key rate is probably low enough

By Ros Krasny

TACOMA, Washington (Reuters) - A top Federal Reserve official said on Wednesday that interest rates have "come way down" in recent months, and with inflation looming the central bank's key lending rate has probably been cut enough for now, despite risks to growth.

Janet Yellen, president of the San Francisco Federal Reserve Bank, said that the U.S. central bank is grappling with a complex mix of issues, but that inflation is weighing heavily on her mind.

"The 1970s were a horrible period. If there's one thing that has to be very high priority, we don't want to go back to a period that is anything like that," she said, critiquing presentations on the economy at a symposium for college students in Tacoma, Washington.

Yellen, who is often seen as one of the Fed's more dovish members, or worried about economic growth, spoke of the need to prevent 1970s-style inflation even as she warned of chance of a "horrid" downward growth spiral, adding that the Fed's policy choices could result in short-gain pain.

Her blunt comments on inflation came a day after she made similar remarks in Vancouver.

But she noted the Fed's policy dilemma in trying to both contain inflation and encourage growth, saying, "It's not a simple, straightforward set of issues that we face at the moment."

The Fed has cut its benchmark interest rate by a total of 3.25 percentage points since mid-September to stoke growth amid fears the United States could slide into recession.

Lately, financial markets have been guessing that the Fed thinks it has done enough to shore up growth and will stand aside for several months before possibly raising interest rates at year end.

Earlier, Eric Rosengren, president of the Boston Fed, said the months-long crisis in credit markets might not have yet claimed its final victim.

The U.S. economy has slowed noticeably, which along with falling house prices and surging food and energy costs poses further threats to financial institutions, Rosengren said in a speech in Boston.

NO 1970s NOSTALGIA

Yellen, who is not a voting member of the policy-setting Federal Open Market Committee in 2008, said policy-makers are determined to repeat flawed actions taken in the 1970s, when oil and other commodity prices were ratcheting higher.

"During the 1970s the Fed failed to keep inflation low in the face of supply shocks (which) became incorporated into inflation expectations," Yellen said.

Earlier on Wednesday, former Fed Chairman Paul Volcker warned a 1970s-style period of skyrocketing inflation was possible if investors lose confidence in the buying power of the U.S. dollar.

Yellen said that an inflation spiral or unchecked rise in inflation expectations has not developed so far.