Even as the economy begins to recover, substantial slack in resource utilization is likely to continue to damp cost pressures and maintain a competitive pricing environment. I expect that the persistence of economic slack, accompanied by stable longer-term inflation expectations, will keep inflation subdued for some time. Indeed, if inflation expectations were to begin to ratchet down toward the actual inflation rates that we have experienced recently, inflation could move appreciably lower.

In brief, I think neither a harmful deflationary episode nor a repetition of the Great Inflation is very likely.  Stimulative policies combined with the economy's resilient market forces will, over time, reduce resource gaps.  Deflation has been averted.  And as the economy continues to improve, and when we see rising inflation pressures, Fed policy will respond aggressively.

[F]or the immediate future, the risk to price stability is a deflationary risk, not an inflationary one.
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[W]e are likely to see a prolonged period of sluggish economic performance and uncomfortably high unemployment as businesses reallocate capital and labor to fit the new economic landscape.

I think the predominant risk is that inflation will be too low, not too high, over the next several years. I take 2 percent as a reasonable benchmark for the rate of inflation that is most compatible with the Fed’s dual mandate of price stability and maximum employment. This is also the figure that a majority of FOMC members cited as their long-run forecast for inflation, according to the minutes of the committee’s April meeting.
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With unemployment already substantial and likely to rise further, the downward pressure on wages and prices should continue and could intensify. For these reasons, I expect core inflation will dip to about 1 percent over the next year and remain below 2 percent for several years.

If the economy fails to recover soon, it is conceivable that this very low inflation could turn into outright deflation. Worse still, if deflation were to intensify, we could find ourselves in a devastating spiral in which prices fall at an ever-faster pace and economic activity sinks more and more. But I don’t view this as likely.

[T]he idea has been to avoid that {a deflationary trap} during the most difficult period here in 2009, but in doing so we’ve increased the monetary base dramatically. We’re also running very large fiscal deficits; normally those would be considered very inflationary developments; so, we kind of have this medium-term inflation risk even while we have a short-term deflation risk.

As to price stability—the touchstone of central banking—given the vast amount of slack worldwide, the near-term outlook for inflation is meek. Indeed, the recent pressures have been to the deflationary side, though we seem to have beaten that back.

Neither deflation nor inflation engenders confidence. Both distort decisionmaking of households as well as businesses. Both inhibit sustainable employment growth. If you want to know the outlook for inflation over the next quarter or next year, look at current domestic and global slack: It is doubtful that inflation will raise its ugly head until employment and capacity utilization tighten. Looking further out, however, Milton Friedman—whom many consider the Moses of monetary policy—reminds us that inflation, defined as “a steady and sustained rise in prices,” is “always and everywhere a monetary phenomenon.”[4] Bearing this in mind, we must be careful with the deployment of our monetary initiatives.

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.

[I]f economic growth resumes in the United States as I expect, the threat of deflation should diminish commensurately... As for liquidity provision and inflation, it is important to emphasize that 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. Thus, there is ample time for the Federal Reserve to withdraw excess liquidity as appropriate.

[A]s far ahead as I trust my forecasting ability[5] (that is to say, the next couple of years), the problem with regard to maintaining price stability most certainly is not inflation.

We are also conscious of a potential adverse feedback loop between persistent economic weakness and a continuing decline in inflation and inflation expectations...  Indeed, if such a process continued for some time, we could fall into deflation, much as Japan did for a time in the 1990s and earlier this decade. Then again, the substantial increase in the size of the Federal Reserve's balance sheet as a result of the credit programs that have been implemented have led some to worry that inflation could rise sharply when the economy recovers unless the Federal Reserve moves quickly when the time comes to unwind the programs and limit the growth in credit.

Another concern that I hear expressed with increasing frequency is that the huge expansion of Fed lending will trigger a surge in inflation. The worry seems to be that the Fed has financed its credit programs by increasing the excess reserves of commercial banks, and these reserves could eventually fuel an inflationary surge...

With regard to inflation, I think fears that inflation will jump once the economy begins to recover are overdone for several reasons. First, and most important, the Fed is fully committed to maintaining price stability within its dual mandate...

Should lingering financial turmoil continue to weigh on the economy and stretch the recession out still longer, the zero or negative inflation could continue through 2009. Over that time frame, deflationary expectations could become entrenched. For this reason I think we face some risk—at this point only a risk—of sustained deflation. One important near-term goal for monetary policy is to guide the economy away from this outcome.

From a speech entitled "Dial M for Monetary Policy"

I'm not tremendously concerned about deflation.

In comments to the press, as reported by Bloomberg News

“I am worried about deflation,” Bullard said today to a meeting of financial analysts in Clayton, Missouri. “Unexpected deflation would worsen the situation in our housing and mortgage markets.”

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Bullard, 47, expanded on his deflation comments after the speech, telling reporters he sees a “downside risk on inflation” with the recession likely to persist until the third quarter.   “You could end up in negative territory” on prices, he said. “I am worried about it, partly because of the global nature of this recession and I think we are not going to get any good news into the fall of this year. That is going to continue to put downward pressure on prices for a period. Policies have to be designed to avoid that outcome.”

I am not particularly concerned about the possibility of persistent deflation. When oil and commodity prices stabilize, the negative rates of inflation we have seen in the CPI are likely to disappear. Moreover, I am confident that the FOMC is committed to maintaining price stability. Nonetheless, we must act to ensure that expectations of deflation do not take root, just as we must act to ensure that expectations of higher inflation do not emerge. The failure to maintain well-anchored inflation expectations can wreak havoc with the real economy, foster unnecessary volatility, and make it more difficult for the Fed to deliver on its dual mandate to keep the economy growing with maximum employment and price stability.

I and others have long proposed establishing an explicit inflation target as one way to signal the FOMC's commitment to price stability and help anchor expectations. Such a commitment not only helps prevent inflation expectations from rising to undesirable levels, but it can also help prevent expectations from falling to undesirable levels.