Supported by actions from the federal government and the Federal Reserve, Gross Domestic Product will see moderately positive growth by the end of 2009 or early 2010, San Francisco Federal Reserve Bank President Janet Yellen said Wednesday. Speaking to the Forecasters Club of New York, Yellen warned that in terms of unemployment, the worst of the recession is not expected to occur until next year.

In addition, the San Francisco bank president warned in prepared remarks that for some time to come, disinflation, and even deflation, will represent greater risks than inflation, predicting economic slack for several more years.

We need to be sure that we avoid the kind of deflation that Japan experienced during its lost decade, she cautioned. While I don't think such an outcome is likely, it should be on our list of concerns.

Policymakers face serious challenges in the face of what many have called the worst economic downturn since the Great Depression, currently in its fifth quarter. Although Yellen still predicts a resumption of positive growth by the end of 2009, she relented that her forecast is far from assured.

I must admit that I see considerable downside risk, and my confidence in this outlook is greatly diminished by the nearly unprecedented set of circumstances we face, circumstances that severely challenge our ability to use historical economic relationships to anticipate future developments, Yellen said. We face an extraordinarily uncertain future, and our main hope for economic recovery lies in the sorts of innovative and aggressive economic policy responses that are being carried out by Federal Reserve and federal government policymakers.

To that end, she encouraged policymakers to continue to use all available tools to boost the economy, adding that this is no time to relax our efforts.

Rather, the lingering uncertainty provides a very strong case for continuing bold, simulative policy actions, Yellen said.

Yellen, who is a voting member of the Federal Open Market Committee in 2009, praised efforts from the Obama administration in terms of its $787 billion stimulus package. Although it is not singularly enough to jump start the economy, she called the stimulus welcome and said its positive effects are likely to be felt as soon as the third quarter.

Despite the stimulus , Yellen was wary of optimism that the unemployment level will decline in the near future.

The level of the unemployment rate would still rise throughout 2009 and into 2010, she said. So, in this sense, the worst of the recession is not expected to occur until next year.

And, even by the end of 2011, I would expect the unemployment rate to be above its full-employment level, she added.

In terms of the housing crisis, Yellen was hesitant to call a bottom in the crash, stating that there is not yet any clear sign that the contraction in home building is approaching its end.

The recent news that housing starts and permits had jumped in February provides a ray of hope, but it's too soon to know if this is noise or a signal that the contraction will soon end, she added.

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