Fed's Yellen: Can't have easy money for too long

Federal Reserve Board Chairman Ben Bernanke poses with board members in a March 2009 photo.

HONG KONG (Reuters) - The U.S. economy will grow into next year and ultra-cheap money policies cannot be maintained for too long, though the recovery will be slow, Federal Reserve Bank of San Francisco President Janet Yellen said on Tuesday.

"We all understand very well that we cannot have an accommodative policy for too long. That once these conditions no longer prevail, it is a core responsibility of the Federal Reserve to preserve price stability," she said after a speech in Hong Kong.

Yellen, a voting member on the Fed's policy-setting body, also said there was a need to monitor asset markets but that she saw no sign in credit spreads of an asset bubble or that U.S. stocks were overvalued.

"We need to monitor developments in asset markets," she said. "Low interest rates in the U.S. are triggering capital outflows."

Indeed, Norman Chan, chief executive of Hong Kong's central bank and who sat next to Yellen during a panel discussion, asked her directly to what extent a basically zero-interest rate policy in the United States was necessary and helpful.

Hong Kong pegs its currency to the U.S. dollar and effectively outsources monetary policy to the Fed, and low rates in the open Asian economy are helping to inflate a property market bubble.

Yellen defended its near-zero rates by saying the crisis measures were necessary to avoid a "black hole of deflation"

NO MORE STIMULUS, NO PLAN B

Earlier Yellen said in prepared remarks that whether or not interest rates should be set according to asset prices is still an open question.

"The crisis of the past two years has prompted many of us to re-examine the widely held view that monetary policy should respond to asset prices only to the extent that they influence the anticipated trajectories of inflation and unemployment."

Yellen said the credit crisis has erased the division between setting monetary policy and regulation. In this vein, the Fed has to become more pre-emptive in identifying risky behaviors in financial markets before they become problems, she said.

Stimulus measures already taken would be successful in bringing the economy back to growth and there were no plans for further credit easing, she added.

"We are not going to push them (the emergency actions to increase liquidity in the banking system) further," she said. "There is no plan B."

Former Bank of England deputy governor John Gieve, who also sat on the panel sponsored by the Institute of Regulation & Risk North Asia, added, "There was never a plan B, so it's good plan A worked."

Last week in a speech, Yellen questioned the strength and durability of the U.S. economy, which expanded in the third quarter for the first time in more than a year.

(Editing by Andy Bruce)