The U.S. economy is starting to climb out of a deep hole but with a tepid recovery likely it will remain vulnerable to shocks, a top Federal Reserve policy-maker said on Monday.

Janet Yellen, president of the San Francisco Fed, said that the Fed's policies need to protect against disinflationary forces that currently pose a bigger threat to the U.S. economy than the possibility of inflation.

The economy seems to be brushing itself off and beginning its climb out of the deep hole it's been in, Yellen said in remarks prepared for the Certified Financial Analysts of San Francisco.

The severe recession probably ended in the summer, and the U.S. economy will grow in the second half of 2009 as housing, manufacturing and even consumer spending start to show some signs of life, she said.

But Yellen, a voting member of the monetary policy-setting Federal Open Market Committee in 2009, said that consumers could not be relied on to power a recovery.

It may well be that we are witnessing the start of a new era for consumers ... The destruction of their nest eggs caused by falling house and stock prices is prompting them to rebuild savings, said Yellen.

Yellen said views on the inflation outlook have coalesced into two diametrically opposed views, but threw her weight behind those worried on falling prices -- a consequence of high unemployment and substantial slack in the economy.

With slack likely to persist for years, it seems likely that core inflation will move even lower, departing yet farther from our price stability objective, Yellen said.

Yellen said fears that the Fed would be pressured to monetize the growing U.S. budget deficit were real, growing, and disruptive -- but also misplaced.

We at the Fed are and will remain fiercely independent from politics. We have the means -- and we certainly have the will -- to tighten policy when the time is right.

(Editing by James Dalgleish)

Manufacturing Inflation