Fed's Yellen-Jobless jump underlines economy's ris

By Ros Krasny

LOS ANGELES, Sept 5 (Reuters) - San Francisco Federal Reserve Bank President Janet Yellen said on Friday
that an unexpected jump in the August U.S. unemployment rate highlights the risk of a vicious cycle of
weakness locking into place for the U.S. economy.

Yellen's comments, prepared for delivery to the Rotary Club of Los Angeles, were similar to those made in
Salt Lake City on Thursday.

Since then, though, the Labor Department announced on Friday that the August jobless rate rose to 6.1
percent, far above the July level of 5.7 percent.

Yellen said the economy faces "a deepening of the adverse feedback loop" that she has been describing for
most of 2008: more joblessness causing more mortgage defaults, tighter credit conditions and further downward
pressure on activity and employment.

"This kind of process represents a downside risk for the economy, and today's jump in the unemployment
rate highlights that risk," she said.

At 6.1 percent, joblessness is more than a full percentage point over "full employment," Yellen added.

Yellen said the current fed funds rate of 2 percent is not "excessively stimulatory" because financial
conditions are more restrictive now than they were a year ago.

"Policy must be calibrated to push through the substantial headwinds the economy faces," she said.

As well as a gloomy economic outlook, Yellen focused on much-improved prospects for inflation

"Inflation risks have diminished somewhat in recent months as commodity prices have come down from their
highs," Yellen said. "I am very hopeful that inflation will come down quite substantially, though perhaps not
as fast as I'd like."

Yellen is not a voting member of the central bank's Federal Open Market Committee in 2008.

(Reporting by Ros Krasny, Editing by Chizu Nomiyama,)