Jan. 4 (Bloomberg) -- The U.S. economy faces a “serious risk” of stagnating for an extended period of time and “it’s worth pulling out all the stops” on fiscal stimulus, said Federal Reserve Bank of San Francisco President Janet Yellen.

“The current downturn is likely to be far longer and deeper than the ‘garden-variety’ recession,” Yellen said in the text of a speech today in San Francisco. “If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now.”

Yellen’s remarks indicate that support for new stimulus to revive the economy is gaining momentum within the central bank. Chicago Fed Bank President Charles Evans endorsed such policy yesterday, following Fed Chairman Ben S. Bernanke’s lead in October.

“Although our economy is resilient and has bounced back quickly from downturns in the past, the financial and economic firestorm we face today poses a serious risk of an extended period of stagnation,” which may intensify financial-market conditions, Yellen, 62, said during the annual meetings of the Allied Social Science Associations and the American Economic Association.

“It’s worth pulling out all the stops to ensure those outcomes don’t occur,” she said.

Last month, Fed policy makers reduced the federal funds rate, or the rate banks charge one another for overnight loans, to as low as zero for the first time in an attempt to end the longest economic slump in a quarter-century. The central bank is also shifting its focus to the amount and type of debt it buys, with announcements of new lending programs or asset purchases serving as the principal signals of policy.

‘Essentially Zero’

“With nominal interest rates now essentially zero, we have reached the limits of what conventional monetary policy, working through short-term interest rates, can do to stimulate the economy,” Yellen said. “Restoration of the financial system to full health will be a long, drawn-out process.”

President-elect Barack Obama is working on a stimulus package of tax cuts and spending on roads, bridges and other infrastructure aimed at creating or saving 3 million jobs. Obama advisers and congressional Democrats estimate the stimulus plan may total $850 billion, while some economists are recommending as much as $1 trillion.

Economic data released during the past week show U.S. consumer confidence sinking to the lowest level in at least 41 years and home prices in 20 major cities declining at the fastest rate on record. A third report also showed that the decline in U.S. manufacturing deepened in December.

‘Strong Case’

“There is an exceptionally strong case for substantial fiscal stimulus over the next few years,” Yellen said. She said she backs the International Monetary Fund’s recommendation for a “diversified package of policies.”

“I am sanguine that the Fed’s new programs will be helpful in restoring credit flows,” Yellen said. “But many of the new approaches are experimental, and there is a great deal of uncertainty concerning their likely effects.”

“Even with vigorous Fed action to restore credit flows, an extended period of economic weakness is likely,” she said.

Yellen, who has been the San Francisco Fed’s president since June 2004, is a former Fed governor and ex-chairman of former President Bill Clinton’s Council of Economic Advisers. She is scheduled to vote on interest rates this year.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

Last Updated: January 4, 2009 14:10 EST