The U.S. recession will drag on for some months before a recovery starts in late 2009 or early 2010, but the future is still clouded by risks, top Federal Reserve officials said on Wednesday.

Monetary and fiscal authorities have plenty of ammunition to combat the deepest downturn in decades and the measures already taken will be critical in driving a recovery, the presidents of the Federal Reserve banks of San Francisco and Cleveland said in separate remarks.

I'm convinced this is no time to relax our efforts, Janet Yellen, president of the San Francisco Fed, told the Forecasters Club of New York.

The United States may see moderately positive growth of real gross domestic product later this year or early in 2010, said Yellen, who is a voting member of the U.S. central bank's policy-setting Federal Open Market Committee in 2009.

But those forecasts are highly uncertain, she added.

While there are good reasons to think the economy could begin to recover fairly soon, I'm far from confident, she said. Unemployment will likely continue to increase before peaking in 2010, she said.

Cleveland Fed President Sandra Pianalto, who is not an FOMC voter this year, was similarly cautious in a speech to business leaders in Maumee, Ohio.

I expect the economy to recover next year as the fiscal stimulus boosts spending and as we work off excess inventories, Pianalto said. I have to warn you, however, that this outlook is subject to a number of strong downside risks.

In particular, Pianalto said a vicious cycle between the hobbled credit markets and the weak economy could continue and become mutually reinforcing, despite the Fed's unprecedented range of policy actions.

Credit constraints remain at the heart of the current challenges, she said.

HEALING CREDIT MARKETS

Yellen said an array of unconventional programs put in place by the Treasury and the Fed are the best hope for recovery.

For me, this extreme uncertainty about the future creates a very strong case for bold policy actions on a broad front ... to stimulate economic activity and prevent inflation from falling any further, she said.

The Fed last week vowed to pump an additional $1 trillion into the U.S. economy in an aggressive bid to battle a deep recession, partly by buying government bonds for the first time since the 1960s.

As well as buying Treasuries, the Fed said it would expand an existing program to buy debt and securities issued by mortgage finance agencies in an effort to lower mortgage rates.

Yellen said she supports the approach of targeting a range of credit markets, adding the various Fed and Treasury efforts offer the prospect of more normal financial market functioning this year.

Pianalto said the Fed's push into what is often termed quantitative easing represent our efforts to lower interest rates and ease credit conditions in a range of markets, even when the federal funds rate is near zero.

Those programs are having success, she said, noting that 30-year fixed mortgage loan rates have fallen sharply since the Fed announced plans to buy mortgage-backed securities.

Yellen, however, cautioned it would be difficult to gauge the size of the impacts of the Fed's various programs. We are using new policy tools and we simply don't have the experience needed to pin down the magnitude of the impacts, she said.

INFLATION FEARS OVERDONE

Yellen said fears that inflation will speed up once the economy begins to recover may be overdone.

For some time to come, disinflation -- and even deflation -- will represent greater risks than inflation. With economic activity weakening, economic slack is likely to be substantial for several more years, she said.

Core inflation could remain below 1 percent for the next several years, she said, noting that Japan-style deflation was unlikely.

The Fed can certainly sell the Treasury debt it is expected to buy at some point, when the economy is in better shape, Yellen said.

Separately, Fed Governor Elizabeth Duke on Wednesday said regulators should not greatly constrain lending by financial firms with onerous regulation at a time the Fed is working so hard to get credit flowing again.

It is important that supervisors remain balanced and not place unreasonable or artificial constraints on lenders that could hamper credit availability, Duke said at a House Financial Services Committee hearing.

Speaking with reporters, Yellen said that China's worries about the U.S. dollar's value was understandable given its massive holdings of greenbacks and lack of reserves diversification.

A recent suggestion by China's central bank governor to consider using the International Monetary Fund's basket of dollars, euros, sterling and yen as a supernational reserve currency was interesting, but far from being a practical alternative at this point, she said.

Inflation Quantitative easing