SAN FRANCISCO The Federal Reserve is intent on not letting inflation spiral out of control, even as the economy teeters on the brink of recession, a top Fed policy-maker said on Tuesday, indicating that more interest rate cuts are not in the offing.
"This is not the 1970s, but we can't let it get to be the 1970s. Our behavior is critical to that. We have to be the barrier" to high inflation, Janet Yellen, president of the San Francisco Federal Reserve Bank, told reporters after a speech.
Although data showing more economic weakness almost certainly lies ahead, that would not make an automatic case for more rate cuts -- though rate increases could be some ways off, she said.
That suggested the Federal Open Market Committee has reached an inflection point in its interest rate policy after a series of rate cuts since last September, and could start an extended pause in rate moves at its June 24-25 meeting.
"I consider the current level of monetary accommodation to be appropriate," Yellen, who is not a voting member of the FOMC this year, told a Financial Planning Association of Northern California conference in San Francisco.
Some market-based measures of inflation expectations have risen recently, a worry for the Fed, but that expectations had not become "unmoored," Yellen told reporters.
"At a time when commodity prices are rising as rapidly as they are, inflation is a concern," she said. Those price hikes, especially for energy and food, are taking "a huge toll on households."
Weakness is likely to persist in the residential housing market, which might not hit rock-bottom until next year, she said.
Separately, Federal Reserve Governor Randall Kroszner, speaking in Sao Paulo, Brazil, said the U.S. housing market should begin to show some improvement by year-end and into 2009, but the recovery would not be uniform.
"Some markets will take longer than others," Kroszner said at a conference sponsored by Brazil's central bank.
The U.S. central bank has slashed its benchmark interest rate to 2 percent currently from 5.25 percent since mid-September in response to the housing and credit market crunch that has pushed economic growth down to minimal levels.
The rate cuts, along with the federal tax rebate stimulus program, "should be sufficient to promote a step up to moderate economic growth later this year," Yellen said.
She said the tax rebate checks should make a notable difference in the second and third quarters of this year.
In line with comments earlier this month, Yellen, who gave no indication that she favored another cut to benchmark interest rates, noting that the real federal funds rate -- the fed funds rate minus the rate of inflation -- is "at an accommodative level of around zero."
The Fed's 12th District president is typically seen as one of the central bank's more dovish members, or leaning toward supporting economic growth.
From here, "the Fed will have to be attentive to removing accommodation" as growth recovers, she said, adding that potential rate hikes are "down the road."
Opposition to rate cuts within the FOMC has become increasingly pointed in recent months.
Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser have dissented from the last two decisions to lower rates. For Fisher, April's meeting marked a third consecutive dissent.
Minutes from the Fed's April 30 policy meeting issued on Tuesday showed the directors of seven of the 12 regional Federal Reserve banks wanted to hold the discount rate -- that charged on direct Fed loans to banks -- steady at 2.5 percent.
Those seven banks "viewed concerns about the outlook for inflation as offsetting concerns about the subdued outlook for the real economy," the minutes said.
In the end, the Fed's board approved a quarter-point cut in the rate to 2.25 percent, matching a quarter-point cut in the fed funds rate.
Financial markets suggest the FOMC will keep benchmark rates steady for now, before possibly starting to raise rates in the fourth quarter. Prospects for a quarter-percentage point rate increase in October are running at about 50 percent.
Yellen said the U.S. economy faces headwinds from financial turmoil, the weak housing market and high commodity prices that together make risks to the growth outlook unusually high.
Whether or not the current slowdown is technically a recession might not be known for months or even years, when final figures can be pored over by the National Bureau of Economic Research, she said.
(Additional reporting by Tim Ahmann in Washington and Elzio Barreto in Sao Paulo; Editing by Leslie Adler)