Comments from two senior Federal Reserve officials on Monday touched on what could become a struggle in the coming months and years over how and when to unwind the bank's dramatically accommodative policy.

The line between policy hawks and doves on the Federal Open Market Committee on the inflation outlook will likely become more pointed now that the U.S. recession appears to be over and the world's largest economy embarks on a tentative recovery.

In my career, I have never witnessed a situation like the one that exists now, when views about inflation risks have coalesced into two diametrically opposed camps, said Janet Yellen, San Francisco Fed President.

Speaking in San Francisco, the 2009 FOMC voter put herself in the ranks of those still worried about disinflation or outright deflation in the U.S. economy as high unemployment looks set to drag on for years.

Our foot is down on the pedal of stimulus as far as we can possibly go, Yellen said after a speech to the San Francisco Society of Certified Financial Analysts and that stance is still right for now, she added.

The U.S. central bank has set its official interest rate near zero since December and created a number of unorthodox programs to reopen incapacitated credit markets. As the recovery progresses, the timing and velocity of interest rate increases and other measures to wind down accommodative policy -- the so-called exit strategy -- will be a key factor for U.S. Treasury markets and investors across a range of assets.

The recovery is likely to be tepid even if the long recession seemed to end during the summer and the economy is set to grow in the second half of 2009, she said. Like other Fed officials recently, she cited inventory investments, not job creation, as the major catalyst for growth at this point.

Even gross domestic product growth of 3 percent to 4 percent in the next few quarters, should it occur, would do little to dent the ranks of the unemployed, said Yellen, suggesting a certain circularity to the possible jobless recovery.

Weakness in the labor market is another factor that may keep the recovery in low gear for a while, she said. My business contacts indicate that they will be very reluctant to hire again until they see clear evidence of a sustained recovery.

U.S. consumers, often counted on to power economic growth following a downturn, are still smarting.

The destruction of their nest eggs caused by falling house and stock prices is prompting them to rebuild savings, said Yellen.

Yellen acknowledged, but downplayed, current worries that vast expansion in the Fed's balance sheet could fuel rising inflation over the long haul.

My personal belief is that the more significant threat to price stability over the next several years stems from the disinflationary forces unleashed by the enormous slack in the economy, she said.

It seems likely that core inflation will move even lower ... we need to defend our price stability goal on the low side, and promote full employment.


On the other side of the country, the Richmond Fed's Jeffrey Lacker -- typically one of the central bank's most hawkish members -- said the recovery was on track.

The last couple of months of economic news, I think, have been pretty reasonable. I've been reasonably pleased with them, Lacker said after a speech to the Charlotte, North Carolina, chapter of the Risk Management Association.

Lacker, also an FOMC voter this year, said the Fed should consider if it needs to complete buying mortgage debt, but suggested the purchases could be tapered off rather than halted abruptly.

The Fed has promised to buy up to $1.45 trillion of mortgage-backed securities and debt issued by government- sponsored enterprises Fannie Mae and Freddie Mac by the end of 2009.

Obviously, the state of the economy influences how you think about these things, but also the state of bank balance sheets and the financial system should also be an influence, Lacker said.

Earlier, Lacker said the Obama administration's plan to make it easier to wind down a big financial firm in trouble was not sufficiently clear and must exclude the use of taxpayer money.

Officials should make a clear commitment about what institutions they will not support, he said.

(Reporting by Ros Krasny; additional reporting by Alister Bull in Charlotte; editing by Andre Grenon and Todd Eastham)