By Ros Krasny
BERKELEY, California, May 5 (Reuters) - The United States economy remains in "a very deep hole" but there are signs that the downturn may finally be easing, Janet Yellen, President of the Federal Reserve Bank of San Francisco, said on Tuesday.
"The good news is that, for the first time in a while, there is some good news to savor," Yellen said in remarks prepared for a speech to the Haas Business School of the University of California, Berkeley.
Still, Yellen said that a raft of uncertainties still faced the United States, and that a robust, "V-shaped" recovery looked unlikely from what she said will probably end up being remembered as the worst downturn since the Great Depression of the 1930s.
"I expect the U.S. recovery to be frustratingly tepid once it does get started," she said, adding that unemployment will probably take "several more years" to return to long-run equilibrium levels.
Yellen is a voting member of the Federal Open Market Committee in 2009.
"My forecast that output growth will turn positive in 2009 and proceed near trend in 2010 implies that the unemployment rate will rise from 8.5 percent now to around 9.5 percent by the end of this year," she said.
U.S. households are unlikely to repeat the "spending spree of major proportions" seen in the years prior to the current recession, which started in December 2007.
Yellen said first-quarter U.S. gross domestic product, while very weak, contained some positive signals such as the large decline in business inventories that many see as a pre-requisite to a turn in the economy.
"The first-quarter data suggest that the necessary inventory correction may be quite far along," Yellen said, adding that recent data also offered hints of stabilization in the housing sector.
Yellen said she was "quite skeptical" about the risk of higher inflation being kicked up by the Fed's extraordinary efforts to restore activity in credit markets by pumping up its balance sheet.
At the same time, the risk of deflation created by the large amount of slack in the U.S. economy, and downward pressure on wages, should also be contained by confidence in the Fed's actions, she said.
"The risk of such a deflationary spiral depends crucially on the nature of inflation expectations."
"I see little basis to worry that we will develop an inflation problem. There is more of a reason to think that we could experience some deflation, but the chances of a severe bout of that ailment seem remote," she said. (Editing by Jan Dahinten)