Over the past year, the monetary base has nearly doubled as the Fed has rapidly expanded its balance sheet. But, given the sluggish growth in bank credit, broader money has risen much less—by only around 8 percent. So, we'll need to see much more expansive bank lending if the monetary base expansion is to trigger an inflation response. And we have yet to see this happen in the current economic downturn.

[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.

At this time I'm not overly worried about inflation prospects...Neither expectations nor the key indices tell me at this time that I need to be overly concerned about inflation.

From a technical point of view, I do not see a problem {with the Fed upholding its price stability mandate}– we do have the tools to contract our balance sheet and remove monetary stimulus when we need to do so, as Chairman Bernanke explained in detail in last month’s Monetary Policy Report to Congress. The harder problem is choosing when and how rapidly to remove stimulus as the recovery begins. I am certainly aware of the danger of aborting a weak, uneven recovery if we tighten too soon. But there can be a strong temptation to hesitate when emerging from a recession, awaiting conclusive signs of robust growth. Keeping inflation well-contained may require action before a vigorous recovery has had time to establish itself.

I expect core inflation to remain below 2 percent for several more years.

At this juncture, my assessment is that inflationary and deflationary risks are roughly balanced.

Currently, core inflation is near 2 percent, a level I generally find acceptable. In the near term, I think the downward forces on inflation will be greater than the upward forces, and we could see some declines in core inflation. But over the medium term I see the risks to the inflation forecast as being more balanced.

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.

I would love to be a screeching hawk once again, but I just don't think it is appropriate presently.

[T]here's too much slack in the system right now. And I don't see inflationary pressures rearing their ugly heads particularly if we conduct ourselves properly, which I believe we are doing.

[T]he possibility that the economy is close to a turning point is stronger now than just two months ago. Financial market spreads have improved even as long Treasury and mortgage rates have increased. And disinflationary pressures have been weaker than we had feared.  Part of rightsizing will be to decide where boldness ends.

Currently, with core inflation near 2 percent, I see inflation at a level that would be acceptable under normal circumstances. But these two potentially strong forces work in opposite directions {inflationary and deflationary}, and the Fed must be in a position to respond, whichever force dominates.

I’m sympathetic to the view that policy has to be anticipatory.  If you wait too long you may not be able to address what could at that time be increased inflation expectations and inflation impulses in the economy.

As reported by Market News International.

I see greater risk of higher inflation over the intermediate to longer term.

I have several reasons for this view: First, monetary policy is extremely accommodative. Second…my forecast relies more on forward-looking expectations of inflation compared to the forecasts of many economic models, in which backward-looking elements are more heavily weighted. This means that the very low levels of inflation resulting from the plunge in oil prices during the past year are not given as much weight in assessing whether inflation will remain low in the future as in a model that depends less heavily on recent past inflation to determine inflation expectations. Third, I put less weight on output gaps or other measures of slack as predictors of inflation, which is consistent with both theory and empirical estimates from a variety of economic studies.⁴ And fourth, I am not convinced that the size of the output gap is nearly as big as suggested by others for reasons I just discussed.⁵

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.