May 5 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. economy may be reaching “an inflection point,” with reasons for optimism in rising consumer spending and falling business inventories.

“The good news is that, for the first time in a while, there is some good news to savor,” Yellen said in the text of a speech today in Berkeley, California. “But when it comes to assessing the future of the economy, the dominant theme is uncertainty.”

The bank president’s remarks, along with congressional testimony today by Fed Chairman Ben S. Bernanke, underscore the fragility of the U.S. economy, which is showing some signs of improving. Bernanke told the Joint Economic Committee that another financial shock would undercut the central bank’s forecast for a slow recovery this year.

“I see the economy as vulnerable to a number of downside risks, including the possibility of another disruptive financial event,” Yellen said during a speech at the business school of the University of California, Berkeley. The most likely outcome is that growth resumes at a “low, but positive rate” in the final six months of this year and picks up in 2010, she said.

Consumer spending, which accounts for about 70 percent of the economy, climbed at a 2.2 percent annual pace last quarter, even as gross domestic product dropped at a 6.1 percent annual pace. Business inventories also fell in the first quarter.

‘Crosscurrents in Economy’

“The fact that I can now talk about crosscurrents may mean that the economy is reaching an inflection point,” Yellen said. “I see a lot of downside risk, but at least there is some basis for optimism.”

Fed policy makers refrained last week from increasing purchases of Treasuries and mortgage securities as they watch for signs of an easing contraction. The Federal Open Market Committee kept the federal funds rate target at a range of zero to 0.25 percent for the third straight meeting, and repeated its intentions to keep the target rate low.

The central bank’s initiatives “appear to be lowering longer-term interest rates and easing financial conditions more generally,” Yellen said.

Still, the Fed may be able to offer financial markets additional support, even as the economy rebounds, by increasing the interest rate it pays on bank reserves or by issuing interest-bearing Fed bills to private investors, Yellen said.

Either step would enable the central bank to effectively tighten monetary policy without reducing its support for credit markets, she said. The sale of “Fed bills” would require authorization by Congress and might be the better choice, the bank president said.

Avert Inflation

The Fed will need to remove monetary accommodation quickly enough to avert higher inflation, Yellen said, adding that she sees “little basis” for an inflation problem and a “remote” chance of deflation.

A recovery, once it takes hold, will be “frustratingly tepid,” she said.

The San Francisco Fed is one of a dozen regional banks in the Fed system. Each year, four regional Fed presidents participate on a rotating basis as voting members of the policy- setting FOMC, joining Bernanke, Fed governors and the president of the New York Fed. Yellen is a voter this year.

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

Last Updated: May 5, 2009 22:30 EDT