Despite the lack of evidence of current inflationary pressures, some have expressed concern about the potential inflationary consequences of the Fed's very aggressive monetary measures taken in response to the financial crisis and recession... I am very confident that the Federal Reserve will be able to manage the normalization of its balance sheet with appropriate timing and pace. I do not expect inflation to change the course of economic recovery over my forecast horizon.

Because of the enormous slack in the system, and as you know I tend to be very vigilant about inflation, we’re just not seeing price pressures right now. If anything, the tail risks are on the deflationary side.

Because I hold to this forecast of modest recovery and believe inflation is likely to remain subdued, I fully support the message of the most recent FOMC statement to the effect that the fed funds target rate will remain exceptionally low for an extended period.

On inflation, Bullard said that inflation is currently at reasonable levels, and there's not too much to worry about in the short-term. The risk is the medium term, he said, two to five years out, that if the central bank does not take appropriate action, inflation could become a problem. He said he was confident though that policymakers would act appropriately.

Bullard also added that inflation expectations are key. If inflation expectations went up sharply, "that would trump all other concerns," he said, "and the Fed would take action."

I’m on the record not putting as much weight on the slack argument as others might. It is a factor but it is not as big a factor as many people make it out to be. You always have to look at slack in combination with inflation expectations. And right now, inflation expectations are about as uncertain as they’ve been since the 1980s. There are widely varying opinions about what might happen over the next three or four years. Some people think you might get a lot of inflation in this circumstance with a bloated balance sheet and fiscal deficits. Other people think that the economy will recover slowly and that will put downward pressure on core. I’d be in the former camp on this issue.

Inflation has been running about 1.5 percent recently, and from my point of view, that's ideal. Earlier this year some economists were highlighting the risk that the low level of economic activity could push the rate of inflation down, perhaps even below zero. I think the risk of a substantial further reduction in inflation has diminished substantially since then. In fact, we have seen that even in the early stage of a recovery, inflation and inflation expectations can drift higher. The perception of inflation risk could be particularly pertinent to the current recovery, given the massive and unprecedented expansion in bank reserves that has occurred, and the widespread market commentary expressing uncertainty over whether the Federal Reserve is willing and able to promptly reverse that expansion.

My outlook is for roughly 3 percent (GDP growth) over the next 18 months. That’s positive but modest after this downturn. Unemployment will be high. The combination of very large slack with stable inflation expectations leads me to an inflation outlook which is on the order of 1.5 percent core for the next few years, for the next two years at least.

With that environment, I’m underlying what my own guideline is for price stability. I’d say that’s 2 percent.  With that, policy is likely to continue to be appropriate for 2010 and most likely beyond.

Unless there are unusual developments, I think the policy is going to be highly accommodative, as it is now, for quite some period of time.

From comments to the press, as reported by Bloomberg News

Plosser, who is seen as one of the most "hawkish" Fed officials on inflation, reiterated he was "not worried about inflation in the near-term; my worries about inflation are in the intermediate to long-term."

Plosser told Market News the timing and pace of eventual policy tightening will depend on the economy.  "It's contingent on the path of the economy and of inflation ... It's hard to predict now what that may look like," he said.

"All the excess reserves in the banking system that are sitting there right now are not inflationary, but they could become inflationary if we're not careful," he said.

Some people worry about the long-term inflationary implications of sustained federal budget deficits. Others fear that economic slack and downward wage pressure are pushing inflation below rates that are consistent with price stability. I am in the second camp. Persistent large budget deficits may be harmful once the economy recovers because they are apt to boost interest rates and absorb private savings that would otherwise finance productive investments. But experience teaches us that budget deficits do not cause inflation in advanced economies with independent central banks that pursue appropriate monetary policies.

Even as the economy begins to recover, substantial slack in resource utilization is likely to continue to damp cost pressures and maintain a competitive pricing environment. I expect that the persistence of economic slack, accompanied by stable longer-term inflation expectations, will keep inflation subdued for some time. Indeed, if inflation expectations were to begin to ratchet down toward the actual inflation rates that we have experienced recently, inflation could move appreciably lower.

Based on the historical experience with inflation in the United States and Japan, I personally expect our primary short-run concern to be disinflation rather than inflation. The growth rate of the core PCE inflation index over the past year is 1.3 percent. This rate is well below the 2 percent rate that most members of the FOMC expect to see in the long run, as revealed in their published forecasts.

There remains substantial excess capacity in the economy, and while I expect that we will see positive growth in the third and fourth quarter of this year, it will not be sufficient to make significant headway in improving labor-market conditions right away. This significant excess capacity in labor markets has the potential to be disinflationary at a time when the inflation rate is already below where we expect it to settle in the long run.

So, in the near term, resource slack is likely to depress core inflation measures, but over the medium term, stable inflation expectations will play a larger role. Nevertheless, some people still believe inflation is a serious risk based on the expanding U.S. fiscal deficit and the unprecedented actions taken by the Federal Reserve. These critics point to the large size of the Federal Reserve’s balance sheet, and they question the FOMC’s willingness to raise rates when the time comes to do so. They also cite concerns that the Federal Reserve will succumb to political pressure, and monetize the federal debt.

I have to tell you that I do not share these views. As the minutes of the recent FOMC meetings reveal, a variety of tools are being developed to ensure "that policy accommodation can ultimately be withdrawn smoothly and at the appropriate time." Without going into all of the details, I believe that the Federal Reserve has the tools necessary to manage the balance sheet, to make any needed changes in short-term interest rates, and to ensure that our purchase of Treasury securities is consistent with our dual mandate of price stability and maximum sustainable economic growth. When the time comes to start removing our policy accommodation, I am confident that we have the tools and the will to get the job done.

While I see little risk of inflation in the near term, I do see greater risk of higher inflation in the intermediate to long term for several reasons. First, monetary policy is extremely accommodative. We have expanded the Fed's balance sheet to an unprecedented degree since last fall and have kept interest rates at historically low levels. Second, I put less weight than many other economists do on the idea that economic slack or low resource utilization is a reliable predictor of inflation.

Today, I often hear some forecasters argue that inflation will remain low in the coming years because the slack in the economy is not likely to disappear for some time. Yet, several empirical studies have shown that economic slack is difficult to measure with any accuracy. It is particularly hard to measure slack near the turning points in business cycles, so making policy decisions based on measures of such slack becomes problematic.

Even if the economy grows as I expect, things won’t feel very good for some time to come. In particular, the unemployment rate will remain elevated for a few more years, meaning hardship for millions of workers. Moreover, the slack in the economy, demonstrated by high unemployment and low utilization of industrial capacity, threatens to push inflation lower at a time when it is already below the level that, in the view of most members of the Federal Open Market Committee (FOMC) best promotes the Fed’s dual mandate for full employment and price stability.

In brief, I think neither a harmful deflationary episode nor a repetition of the Great Inflation is very likely.  Stimulative policies combined with the economy's resilient market forces will, over time, reduce resource gaps.  Deflation has been averted.  And as the economy continues to improve, and when we see rising inflation pressures, Fed policy will respond aggressively.