Minneapolis Fed President Gary Stern said on Wednesday that inflation expectations will be determined by how the Federal Reserve raises rates.

Speaking to the Wisconsin Chamber of Commerce, Stern said the Fed is "highly sensitive" to the threat of higher prices, but that inflation expectations are reasonably well-anchored.

He added that inflation is too high for comfort, but that he is confident the Fed will act to achieve its mandate on prices.



On housing, Stern said the housing downturn looks more severe than the 1990s shock, noting that the residential housing inventory remains large and the housing adjustment is ongoing.

He also said the economy is facing similar challenges to those in 1990 and 1991, adding he sees some signs of improvement in markets.

Stern said he cannot rule out a credit crunch, adding that the U.S. is likely to see modest growth with some rise in unemployment. He noted the Fed has decided to address the weaker economic outlook and that Fed policy has been "wholly appropriate."

He added Fed policy must be flexible to incoming events and data and that policy-makers should always be on guard for future financial crises.

By Stephen Huebl and edited by Nancy Girgis