The potential for headwinds is integral to thinking about U.S. economic prospects over the next year or two. To the extent that headwinds gain momentum, and we have seen a few squalls already, they suggest relatively modest growth for a time and the likelihood of increases in the unemployment rate.

As reported by Market News International

So-called 'headline inflation,' boosted by outsize increases in energy and food prices, is clearly too rapid for comfort.

Core measures of inflation, which abstract from fluctuations in prices of food and energy, have been better-behaved, perhaps because real incomes and spending have been restrained by the run-up in food and energy costs.

As reported by Market News International

The implications of the headwinds for inflation are not so clear, although I would note that the pace of inflation diminished in the 1990s relative to its performance over the preceding several years.

As reported by Market News International.

Under these circumstances, I consider the current level of monetary accommodation to be appropriate. That, together with the fiscal package, should be sufficient to promote a step up to moderate economic growth later this year. Likewise, I would expect that inflation will moderate in coming quarters, as more slack in labor and product markets emerges and as commodity prices level off.  Of course, we will continue to monitor developments and act as needed to fulfill our mandate for sustainable economic growth and price stability.

With the unemployment rate currently at 5 percent, it is a little above my estimate of its sustainable level, and the sluggish  performance I expect this year is likely to push unemployment up further.

I see little reason to believe that we have entered, or are about to enter, such a period of stagflation.  For one thing, although current data on growth and inflation have departed from desirable levels, matters looked far worse 30 years ago than they do now. 

At a time when commodity prices are rising as rapidly as they are, inflation is a concern. [Those price hikes, especially for energy and food, are taking] a huge toll on households.

From press Q&A as reported by Reuters

Seeing weak data doesn't automatically point to interest rate reduction. ... I think monetary policy is reasonably positioned now.

From press Q&A as reported by Market News International and Bloomberg News, saying it would take a "a significant change" in the forecast to change her view.

The outlook is indeed really sensitive to real estate prices. [Lower prices could cause a downward cycle and] that kind of adverse feedback loop is a real downside risk for the economy.

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

My central tendency forecast is for the majority of markets to stabilize toward the end of this year and the beginning of next year, though in some regions it will take much more time.

From Q&A as reported by Market News International and Reuters

Challenges in the financial markets will continue. We do see some improvement in many markets. We continue to be very watchful, very mindful of how the markets are evolving.

From Q&A as reported by Reuters.

[The mortgage crisis] is bad and it's getting worse.

As reported by Bloomberg News

Returning the economy to equilibrium requires actions more befitting than changes in the federal funds rate alone. The lending facilities created and employed by the Fed are likely proving useful in this regard. Increasing liquidity by having a central bank lower the federal funds rate can reduce the risk of a more severe financial crisis, but is imperfectly suited to compensate for declines in liquidity arising from retrenchment in the financial sector for long periods.

Determining appropriate policy necessarily involves more than figuring out the neutral real federal funds rate. This reality is especially obvious at present. Inflation has been elevated for some time and prices of commodities are surging. I find these trends particularly vexing at a time when global demand growth, most likely, has slowed.

Consistent with Munger's admonition, the Fed saw it necessary to expand our toolkit beyond the proverbial hammer of the policy rate in the last nine months. And as I discussed in remarks last month, the Fed's nontraditional policy response included the use of innovative liquidity tools to counter the market turmoil and improve the functioning of financial and credit markets.⁴

In my remarks today, I would like to discuss the use of the hammer--the setting of the federal funds rate--particularly in extraordinary times. Of course, determining the proper level of the federal funds rate is rarely simple, given typical imprecision on key economic variables and relationships. It is far more challenging still when the financial architecture is in the early stages of redesign, the economy is adjusting to the aftermath of a credit bubble (witnessed most acutely in the housing markets), and inflation risks are evident.

The Federal Reserve has employed the hammer with considerable force in the last nine months, lowering the federal funds rate by 3-1/4 percentage points, with wide-ranging implications for the economy. Of substantial import, we have filled the toolkit with other implements to provide liquidity and improve the provisioning of credit during the turmoil. But now, policymakers may be well served encouraging a new financial architecture to emerge, aided, in part, by the actions we have taken. Even if the economy were to weaken somewhat further, we should be inclined to resist expected, reflexive calls to trot out the hammer again.

Policy actions should reinforce the notion with stakeholders that further hammering needs to be done, but it needs to be accomplished by the financial institutions themselves in retooling their businesses and rebuilding the credit channel to help ensure a stronger, more durable economy.