"The financial shock and the recession ... present extraordinary challenges for policymakers - challenges that certainly are the most significant and complex since the deep recession in 1980-82, and perhaps since the Great Depression," Yellen said in remarks prepared for a Financial Women's Association lunch in San Francisco.
"With respect to wealth, the combined impact of falling equity and house prices has been staggering."
Yellen said that inflation rates, now tumbling, would probably fall to undesirably low levels for a time.
"With slack in labor and product markets likely to build significantly over the next couple of years, it seems likely that inflation will move, for a time, below levels that are consistent with price stability," she said.
Yellen said weakness was evident in every sector of the economy, with some of the rare holdouts, such as nonresidential construction, now starting to buckle.
In remarks similar to those she made earlier this month to the American Economics Association conference, Yellen said the Fed could strengthen its communication to make it clear it would not allow deflation to take hold.
"By clearly communicating the Fed's commitment to low and stable inflation and by backing that commitment up with determined policy actions should the need arise, any deflationary pressures caused by the weak economy can be contained," she said.
Yellen is a voting member this year of the Federal Open Market Committee, which sets U.S. monetary policy.
In December, the Fed voted to lower its overnight federal funds rate target to a range of zero to 0.25%, and said rates would likely main extremely low for some time - a view echoed by financial markets.
Even without the ability to lower rates further to stimulate the economy, the FOMC is not out of options, Yellen said.
Home loan troubles break records again
Gold sinks to 2-week low
Jobless claims make surprise jump
