The Federal Reserve is “approaching a crossroads” on monetary policy and needs to “carefully” monitor developments and be ready “to act as needed to fulfill our mandate for sustainable economic growth and price stability,” Federal Reserve Bank of San Francisco president Janet Yellen said yesterday.

“We cannot and will not allow a wage-price spiral to develop,” she told the University of California San Diego Economics Roundtable, according to prepared text of the speech released by the Fed.

Predicting modest growth in the year ahead, Yellen expects the economy to pick up in 2009, as the “drag from housing will wane and credit conditions should improve.”

Soaring food and energy prices will keep headline inflation “much higher than I would like over the next few quarters,” said Yellen, adding that she expects commodity prices to level off early in 2009.

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