Nov. 10 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen said monetary policy needs to be kept accommodative to encourage job growth and keep inflation from declining further.

“At some point, of course, we will have to tighten policy -- and we certainly have the means and the will to do so,” Yellen, who is a voting member this year of the rate-setting Federal Open Market Committee, said in the text of a speech today in Phoenix. “Until that time comes though, we need to provide the monetary accommodation necessary to spur job creation and prevent inflation from falling any further below rates that are consistent with price stability.”

Yellen’s remarks echoed the FOMC’s statement last week, which restated a pledge to keep rates “exceptionally low” for an “extended period.” The panel signaled for the first time that a return to growth won’t be enough to change its commitment, saying an increase in rates will depend instead on when the labor market and inflation pick up.

The regional Fed bank chief’s comments were her first since an Oct. 29 Commerce Department report showing the economy returned to growth in the third quarter after a yearlong contraction. The world’s largest economy expanded at a 3.5 percent pace from July through September, spurred by government incentives that enabled consumers to spend more on homes and cars.

Corner Turned

“The recession hasn’t officially been declared over, but a wide array of data suggests the corner has been turned,” Yellen said today. The economy appears to have entered a “sustained period of expansion” even as questions remain about its strength and durability.

In a separate speech today, Federal Reserve Bank of Atlanta President Dennis Lockhart said the economy will probably recover slowly because of rising bank losses, especially in commercial real estate.

“Now that growth has resumed, the overall objective of economic policy should be to bring about a durable recovery and an environment that reduces unemployment as quickly as possible while containing inflationary pressures,” Lockhart said in Atlanta. “The process of achieving this objective will necessarily involve judicious removal of government supports and the normalization of monetary policy.”

U.S. banks continued to tighten lending standards for companies and consumers in the third quarter, according to a Fed survey released yesterday, reinforcing the central’s bank judgment last week that “tight credit” is hampering the recovery.

Loan Demand Weakens

At the same time, the number of banks making it tougher to borrow diminished, the Fed said in its quarterly Senior Loan Officer survey. Demand for most types of loans weakened at a smaller number of banks than in the second quarter, the survey showed.

“Financial conditions have improved markedly in some respects, but many financial institutions are still hobbled with bad loans,” Yellen, 63, said in her speech today. “Clearly, the financial system is not yet back to normal, but it has bounced back notably.”

U.S. stocks rallied yesterday, sending the Dow Jones Industrial Average to a 13-month high, after the Group of 20 nations agreed to maintain economic stimulus efforts. The Standard & Poor’s 500 Index is up 62 percent from a 12-year low in March even after dropping 2 percent last month on concern the rebound has gone too far relative to the prospects for economic growth.

Unemployment Jumps

The unemployment rate in the U.S. jumped to 10.2 percent in October, the highest level since 1983, according to a Labor Department report released on Nov. 6. The U.S. economy has lost 7.3 million jobs since the recession began in December 2007, when the unemployment rate stood at 4.9 percent.

The economy is likely to experience a “less-than-robust” recovery and remains vulnerable to shocks, as households rebuild savings and unemployment possibly remains high “for several years to come.”

The “sickening” plunge in the U.S. housing market appears to have ended, with prices starting to rise, she said. Nonetheless, “the outlook for the residential market is uncertain” and prospects for commercial real estate “clearly are weak.”

Home sales increased 11 percent in the third quarter as an $8,000 tax credit for first-time buyers boosted demand for entry-level properties, the National Association of Realtors said today.

Home Sales

Sales of existing single-family homes and condominiums increased to 5.3 million at an annualized, seasonally adjusted rate from the previous quarter. The median price fell 11 percent from a year earlier to $177,900, the Chicago-based group said.

The Fed’s preferred measure of inflation, the personal consumption expenditures price index minus food and energy, is rising at a level that’s below the 2 percent regarded as consistent with price stability, Yellen said. Core inflation will probably “move even lower over the next few years,” she said.

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

Last Updated: November 10, 2009 10:48 EST