* U.S. central bankers stressing "gradual" approach
* Yellen could face questions after policy meeting next week
By Ann Saphir and Jonathan Spicer
SAN FRANCISCO/NEW YORK, March 12 (Reuters) - Janet Yellen has a message to markets: the Federal Reserve will keep interest rates low for a while yet and, when it does begin to tighten monetary policy, it will do so only slowly.
For now, the public has zeroed in on when the U.S. central bank might finally raise rates after more than five years near zero. But that tells only half the story: just as important for American families and businesses is how quickly the Fed will hike borrowing costs, and how high.
The Fed has telegraphed that the first rate rise is likely to come around the middle of next year, as long as the U.S. economy keeps healing, and policymakers are increasingly describing how the first tightening cycle in more than a decade will play out. It is an issue that Yellen, who took over as chair of the central bank last month, will almost certainly have to address after a policy meeting next week.
The plan for now is for a series of modest rate increases that do not risk sending the economy into relapse, according to Fed policymakers who have discussed it in recent weeks.
While an unexpected jump in inflation or a dangerous asset bubble could force its hand, the central bank is likely to deliver a dovish message of patience when it comes to removing its extraordinary monetary stimulus.
"What I'm anticipating is that the gradual rise in rates would acknowledge that there are still conditions out there that are sub-optimal," Dennis Lockhart, president of the Atlanta Fed, said in an interview last week.
"I can in no way predict exactly the conditions at that time," he added. But "I don't expect when we get to that point that we're likely to have to move the policy rate up in large chunks to get it high fast."
As with its easing cycle, the Fed will be in uncharted territory when the time comes to tighten. No major central bank has had to raise rates after keeping them at effectively zero for as long as the Fed has in the wake of the 2007-2009 financial crisis and recession.
By stressing a go-slow approach to tightening, the Fed can squeeze a little more stimulus out of its low-rate policy. If financial markets moved to price in a more abrupt tightening cycle, yields on long-term debt would rise, lifting borrowing costs.
"To me you really want to stretch out your expectations about the whole forward path of short rates," New York Fed President William Dudley said last week.
"The more information that the Fed can give about what we are thinking about things going forward, I think the better market participants can assess us and, therefore, financial conditions can be set at an appropriate level."
The Fed could use its March 18-19 policy-setting meeting to map out its plan for rate rises, whether in the formal statement it issues afterward or in Yellen's news conference.
It would not be the first time that a Fed chair will have suggested that rate increases will be far from sharp once they start. Yellen's predecessor, Ben Bernanke, who stepped down at the end of January, said as much last June.
For Yellen, however, the gradualist approach would mark a departure of sorts.
As Fed vice chair she embraced a strategy known as "optimal control" in which rates are kept low for longer than might otherwise be expected in order to boost hiring. This approach would allow inflation to rise above the Fed's 2 percent target for a short time, a problem that would then be addressed by sharper rate rises.
But most of Yellen's colleagues don't sanction such an approach.
Fed policymakers see the key federal funds rate at just 0.75 percent at the end of 2015, and at 1.75 percent by the end of 2016, according to the median of their forecasts published in December. That's even slower than the two-percentage-points-per-year pace at which Alan Greenspan conducted the Fed's last tightening cycle, which has been seen as the model of patience.
Still, what policymakers say today might not be what they do tomorrow.
"They will say 'gradual and measured pace,' but if the data gets a lot better then they will not hesitate to raise rates much faster," said Torsten Slok, chief international economist at Deutsche Bank Securities in New York.
Part of the calculus is deciding how high rates should be once the economy returns to normal. And because economic growth is still hobbled in the wake of the recession, the Fed believes rates may not need to be as high as in the past.
"The issue of how steep the increases are and then also where do we think the new normal interest rates are; I think those are really important questions," John Williams, the head of the San Francisco Fed, said last week.