Analysis: Top Federal Reserve officials are piling pressure on Ben Bernanke to keep US interest rates pegged in the present range of zero to 0.25% indefinitely.

Top Federal Reserve officials are piling pressure on Ben Bernanke, the central bank's chairman, to keep US interest rates pegged in the present range of zero to 0.25% indefinitely, even though futures markets are pointing to a rise in the cost of borrowing some time before year's end.

They also say the world's most powerful central bank should not rush to unwind its stimulus programme as the economy pulls itself out of the worse slump since the Great Depression.

In fact, given prospects for a very slow recovery marked by high unemployment, the Fed's key interest rate could stay near zero for years, said Janet Yellen, president of the San Francisco Fed in a speech ahead of the US July 4 holiday.

"It's not outside the realm of possibilities that the fed funds rate could stay at zero for the next couple of years," Yellen said in San Francisco.

The next Fed policy meeting will not be held until August 11-12 but some of the bank's top officials are clearly laying down markers ahead of the deliberations.

In contrast to some of her colleagues, Yellen has dismissed worries that the United States would be pushed into high inflation by the Fed's policies.

Alan Greenspan, who served as Fed chairman from 1987 to 2006, warned in the Financial Times recently that inflation posed a big threat to the US recovery.

"The US is faced with the choice of either paring back its budget deficits and monetary base as soon as the risks of deflation dissipate, or setting the stage for a potential upsurge in inflation," Greenspan wrote.

Yellen has challenged that idea. She said core inflation, stripped of volatile food and energy prices, could fall toward 1% in the next year - well below her preferred level of 2%. Unlike the Bank of England, the Fed does not make public its inflation target, but it is believed to be 2%.

"The predominant risk is that inflation will be too low, not too high, over the next several years."

Yellen said she was baffled by fears of a "cataclysmic" surge in inflation, and said market forecasts for an imminent rate increase were "jumping the gun".

Short-term interest rate futures, which measure market sentiment toward Fed policy, show about a 50% chance for a rate increase before the end of 2009. The benchmark fed funds rate has been in a range of zero to 0.25% since December.

"History shows us that this kind of (inflationary) concern has caused central banks, both ourselves and Japan, to tighten too early," Yellen said.

"I do not believe that there is a real threat of high inflation in the current situation."

James Bullard, president of the St Louis Fed, also said that the bank's very accommodative monetary policy will remain in place for an extended period.

A premature exit could thwart the recovery that most forecasters now anticipate, Bullard said at a Global Interdependence Centre event at the Philadelphia Fed.

Still, Bullard - one of the Fed's more hawkish policymakers - warned of the need for a defined exit strategy by the Fed to control inflation expectations.

Selling Fed-held assets was probably the most likely way it would choose to go, he stated.

"Without an exit strategy, expectations of high inflation may develop," Bullard said. "If those feed into today's long-term yields, those yields will rise today and hamper recovery prospects."

Yellen agreed to the extent that rising rates could hurt the "still very sick" housing markets by pushing up mortgage rates.

But in general, she played down the idea that the central bank needed to do more to specify what its strategy will be to reverse its accommodative monetary stance.

The Fed "certainly has the means to unwind the stimulus when the time is right," said Yellen, a voting member of the rate-setting Federal Open Market Committee in 2009. Bullard will vote on the FOMC in 2010.

Yellen cited a need to not repeat the policy mistake committed by the Fed during the Great Depression.

In 1936, following two years of robust recovery, the Fed tightened because it was worried about large quantities of excess reserves in the banking system - and in 1937 the economy plunged back into a deep recession.

"Let this not be another 1937, but a time when policymakers have the wisdom and patience to nurse the economy back to health."

Recovery, when it occurs, would be "frustratingly slow," with the unemployment rate unlikely to return to normal for several years, she said.

With the jobless rate last reported at 9.4% for May, Yellen said she would be "thrilled" to see unemployment down to 6% in the next few years, and said achieving that goal demanded the Fed use "every bullet" in its arsenal.

"What could be clearer than the fact that right now we need more demand - not less - to offset the slack in labour and product markets?"

While some parts of the economy are showing signs that the 18-month recession, the most protracted in decades, may soon end, job losses will be seen accumulating long after the economy starts expanding again.

Bullard and Yellen hold different views on potential fallout from the Fed's unprecedented actions to reverse the financial crisis with a series of taxpayer-financed bailouts of large financial institutions.

"If that leads to some sort of erosion, or even the appearance of an erosion, of the independence of the Fed, I think that could be very counterproductive," cautioned Bullard.