By Ian McKendry

WASHINGTON (MNI) – San Francisco Federal Reserve researcher John
Williams said Monday an economic recovery will take years and be
“drawn-out” but he sees the risks of both inflation and Japan-style
deflation as remote.

“I don’t expect the unemployment rate to get back to a normal level
of between 5 and 6 percent for at least four more years,” Williams said
Monday, while presenting his economic outlook in Seattle, Washington.

“In terms of hard numbers, I expect real GDP growth to rise from
this year’s 2.5 percent pace to about 3.5 percent next year and 4.5
percent in 2012,” Williams continued.

Williams said he forecasts inflation to come in at about 1 percent
for the year and remain at the level through 2011 as well, adding that
the inflation rate over the past nine-months is at the lowest its been
since the statistic has been recorded 50 years ago.

However, Williams said lessons learned from Japan in the 1990’s
will allow the Fed to take actions to prevent deflation.

“One lesson from Japan’s experience is the need to act aggressively
before deflation becomes firmly entrenched,” Williams said, adding, “the
Fed has adopted proactive measures to head off a deflationary spiral
before it can take root.”

Addressing concerns that Federal Reserve intervention may cause
“high inflation,” Willams said those risks are “remote.”

“The Fed would like to kick the recovery into a higher gear and
nudge inflation up a bit, avoiding further disinflation,” Williams said.

Williams said there remains significant economic slack with workers
in no position to ask for wage increases, and consumers learning to
wait for bargains before making purchases.

In addition, Williams said, “our retail contacts speak of a brutal
sales environment in which heavy discounting has become the norm and
holiday sales start around Halloween.”

Williams said the Fed is currently falling short of the dual
mandate of maximum employment and stable prices that has been prescribed
by congress, saying “unemployment obviously is unacceptably high,” and
that “inflation is somewhat below the level that is consistent over the
long run with stable prices.”

Still, Williams remained positive saying the economy is on the
right track and said the financial markets have responded well to the
Federal Reserves latest $600 billion stimulus package.

“So far, the responses in financial markets show that this
program is working,” Williams said.

“I am confident that with time we will once again attain maximum
sustainable employment with low stable inflation,” Williams said.

** Market News International Washington Bureau: 202-371-2121 **

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