Fed's Yellen: No tightening in next several months

By Mark Felsenthal

SANTA BARBARA, California (Reuters) - The time for the U.S. Federal Reserve to start pulling back its extensive support for the economy is not close at hand and policymakers have time to decide what sequence of steps they will take, San Francisco Fed President Janet Yellen said on Tuesday.

"We have used the language of an extended period," Yellen, a voting member of the Federal Open Market Committee, told reporters after a Fed conference.

"This is not something I anticipate happening over the next several months. Certainly not."

Yellen's comments are in line with recent Fed statements, which have emphasized that while the U.S. economy may be emerging from recession, the recovery will be tepid and the central bank is in no hurry to raise interest rates, which have been virtually zero since December last year.

Reflecting a cautious mood among policymakers about the pace of the recovery, minutes of Fed meetings released on Tuesday showed Fed regional bank directors felt the economy was gaining strength in the second half of the year although the banking sector was still strained.

Financial markets have been impatient for a clear sign that the Fed is beginning to ratchet back its flood of cash and ultra-low interest rates amid rising stock markets and signs of economic recovery.

On Monday, the Fed announced it is testing one of its tools for withdrawing cash from the banking system, but stressed that the dry run should not be interpreted to mean it has begun to put its exit strategy into operation.

NOT NECESSARY TO DECIDE

Yellen said the U.S. central bank has not made up its mind which tools to use and when.

"I'm not sure it's necessary at this point to have decided on exactly what the sequence will be when the time comes," she said.

Decisions about the exit would be influenced by economic conditions more broadly, but also by conditions in specific financial markets, Yellen said.

The condition of house finance markets might color whether the Fed would sell assets it bought specifically to improve conditions in those markets, she added.

Another Fed official warned that the central bank risks sowing confusion unless it provides markets with clear explanations for the basis of its decisions on which it acts.

Philadelphia Fed President Charles Plosser said the U.S. central bank needs stricter policies dictating when it should step in with bailouts, saying such measures would have reduced confusion during last year's financial crisis.

"Going forward, the Fed as well as other policy makers should strive to follow a systematic, more 'rule-like' approach in bad times as well as good," said Plosser in a speech at Stanford University in Palo Alto, California.