By Ros Krasny
Stern, in a speech to the Economic Club of Minnesota, said the threat of deflation resulting from the downturn in global economic activity should fade as the economy recovers.
"I am guardedly optimistic that many pieces are now in place to contribute to improvement in financial market conditions and in business activity," Stern said. "There is reason to think that improvement is not too far off."
Stern's forecast on the likely timing of a U.S. recovery was more upbeat than those from several other Fed officials this week. Adjustments typically seen in a contraction are under way and should ultimately lead to a general pickup in activity, he said.
The Obama administration's large stimulus package should add to aggregate demand in a timely way, complementing aggressive, often unprecedented, action from the Fed and other policymakers, Stern said.
It is "still too early to tally results" from the Fed's wide-ranging steps to help out credit markets, Stern said. "It is also unclear if further steps will be required."
Stern is currently the Fed's longest serving regional president but is not a voting member of the policy-setting Federal Open Market Committee in 2009.
Credit market conditions have improved unevenly in the past few months, although credit strains could continue to dog the economy for some time, he said.
Stern said that worries about the potential for near-term deflation or longer-term high inflation could not be dismissed out of hand but had self-correction mechanisms.
"If economic growth resumes in the U.S. as I expect, the threat of deflation should diminish commensurately," he said.
Regarding concern for inflation stemming from the Fed's provision of huge amounts of liquidity in response to the financial crisis, Stern said there was ample time to withdraw excess liquidity.
"The relation between growth in the money supply and the path of prices holds in the long run, over periods of at least five and, more likely, 10 years," he added.
(Editing by Kenneth Barry)