We are in a period of economic anemia and I think it's likely to be sustained for a little bit longer than people expect.

From press Q&A as reported by Bloomberg News

Although most of the recent concern about the U.S. economy has been focused on growth, we must also be mindful of inflationary pressures. The news here has been somewhat disappointing.

...

That said, our forecast is for inflation to moderate over the next two years with a leveling out of energy and commodity prices and an easing of pressures on resource utilization due to the slower pace of economic activity. Still, our uncertainty about the inflation outlook has increased, and we will continue to monitor inflation developments very carefully.   

Productivity is the fundamental determinant of growth in the longer run—it determines how we can turn labor and capital inputs into the goods and services we consume and invest. The good news here is that, while it is not as robust as it was in the late 1990s and early this decade, the underlying trend in productivity in the U.S. economy is still solid. This trend provides a sound base for production and income generation to move forward over the longer haul.

Taking all of this into consideration, our outlook at the Chicago Fed is for weakness in real GDP this year, particularly in the first half of the year. However, we think conditions will improve in the second half of the year.

A number of factors will likely hold back activity for some time. The strains on credit intermediation and financial balance sheets mean that credit conditions will likely restrict spending. The large overhang of unsold homes will continue to restrain residential investment. Greater caution on the part of businesses and consumers will likely limit increases in their discretionary expenditures as well. Because financial issues are being worked out against the backdrop of a soft economy, we also have to recognize the risk that interactions between the two might reinforce the weakness in the economy.

Nonetheless, other factors point to improvement later in the year. We have lowered the federal funds rate by 300 basis points since September. At 2.25 percent, the current federal funds rate is accommodative and should support stronger growth. Indeed, because monetary policy works with a lag, the effects of last fall's rate cuts are probably just beginning to be felt, and the cumulative declines should do more to promote growth going forward.

The effects of the fiscal stimulus bill also are likely to boost spending in the second and third quarters of 2008.

The risks to economic growth continue to be sizable on the downside. It's still premature to know what the severity of that might be, if that were the case.

From audience Q&A, as reported by Market News International

Still, a leveling out in oil prices seems the more likely scenario. Surprised as we have been by the rapid, extended run-up in energy costs over the past few years, one would think that the price of a storable commodity such as oil should already embody expectations of continued rapid growth in the developing economies. However, the large run-up in spot and futures prices in recent weeks indicates that market participants are still revising their views of long-term demand-supply conditions. In these circumstances, policymakers must be mindful of the uncertainties surrounding the outlook for commodity prices and the risk that past or future increases in these goods could yet embed themselves in higher long-run inflation expectations and a persistently faster rate of overall price increases. 

I agree that the Fed certainly cannot afford to take for granted that inflation expectations will remain well-anchored.

At the same time, there are downside inflationary pressures relating to the slowdown in the U.S. economy. ... [T]he U.S. economy is particularly exposed to downside risks from the unwinding of the housing bubble and disruptions in financial markets. There is some slack now in the U.S. labor market and, if these downside economic risks materialize, quite a bit more slack could emerge. Even with a flatter Phillips curve, such a development would place some downward pressure on inflation. It is this unpleasant combination of risks to both inflation and employment that the FOMC must balance as it assesses the appropriate path for monetary policy going forward.

I think it is very important ... for central bankers to do their best in keeping a steady hand under emergency circumstance. I am not saying this is an emergency circumstance but when things are volatile, it's important that central bankers be deliberate.

As reported by Market News International

The thirst of the emerging-market economies for raw materials and the relative inefficiency with which they use these raw materials has propelled industrial commodity prices to record levels. The fact that these increases have been persistent and not quickly reversed has raised tough questions about traditional measures of core inflation and made it increasingly difficult for central bankers to separate signal from noise in the inflation data.   

In the current situation, monetary stimulus is facing significant headwinds from the weak condition of some of the interest-sensitive sectors, as well as restrictions in credit availability and a repricing of risk. In these circumstances, a central bank may have to ease policy more in order to achieve its desired effect.

Headline and core inflation have come in higher than anticipated, and inflation expectations have also moved up. If the risk of significant damage to growth from these financial market pressures is attenuated and if global growth remains strong and drives a continuing rise in energy and commodity prices, then inflation may not moderate as much as we anticipate. If the medium term outlook for inflation deteriorates significantly, the FOMC will move with appropriate speed and force to address this risk.

Economic activity slowed sharply last quarter, and that softness has clearly spilled over into the current quarter. The projections I made at the end of January show sub-par economic growth over the near term as the fallout from residential real estate deepens, further straining financial markets and disrupting the flow of credit to businesses and households. Over time, I expect these restraining influences to diminish. I also project that economic slack, combined with a leveling off of energy and commodity prices, will help to bring inflation down from its recently elevated readings to a level consistent with price stability.

The current economic environment is exceptionally fluid, and the economy faces some substantial risks. The Federal Reserve is committed to addressing these risks as we remain focused on achieving our dual mandate of price stability and maximum employment.

The most recent economic projections made by the Federal Reserve Board members and Reserve Bank presidents, which were submitted in January, show a central tendency for real GDP growth this year of 1.3 to 2.0 percent.  ...

The central tendency projection for core PCE inflation in 2008 is 2.0 to 2.2 percent, revised up from 1.7 to 1.9 percent projected in October. However, the FOMC participants' projections call for inflation to moderate over the next two years. Overall PCE inflation is projected to decline from its current elevated rate, assuming that energy and food prices flatten out. This measure is projected to return to a range of 1.7 to 2 percent in 2010.

Those are the projections of the FOMC participants, and the projections that I submitted in January fall within those central tendency ranges.

We have good reason to think that current financial strains have substantially slowed the pace of economic activity.