Despite rising oil prices and high headline inflation over the last several years, the Fed's inflation credibility helped keep price expectations anchored, Federal Reserve Bank of San Francisco President Janet Yellen said Friday.
Yellen, a voting member of the Federal Open Market Committee, said the FOMC's new longer-term inflation forecasts should help keep inflation expectations at around 2%.
"My hope is that inflationary expectations will remain similarly well-anchored now, serving to stabilize core inflation," she said.
Speaking in New York, Yellen said the Fed must continue to remain vigilant in guarding its inflation credibility.
"But I did not think then, and I do not think now with the benefit of hindsight, that expectations became or were close to becoming unanchored at any point," she said.
Commenting on the dramatic decline in oil prices over the second half of 2008, Yellen said the "extraordinary weakness" in the economy has meant the typical trade-offs associated with such supply shocks aren't' in play right now.
"Any boost to spending from falling oil prices will be more than welcome in the current circumstances. And with inflation now below desirable levels, a decline in inflationary expectations that could push core inflation down over time would be most unwelcome," she said.
By Stephen Huebl and edited by Sarah Sussman
©CEP News Ltd. 2009