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"Economic conditions do not yet call for the Fed to exit from its unconventional policies," Janet Yellen, Fed Vice Chair, said during a panel discussion at Yale University in New Haven, Connecticut.</p>
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Yellen's comments focused on how the Fed handled the challenge of boosting economic growth once it reached the "zero bound" on interest rates in December 2008.</p>
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Her caution on reversing policy too soon were at odds with some of the Fed's hawks, who have been urging a quick reversal to get ahead of rising inflation.</p>
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On Friday, Dallas Fed President Richard Fisher called on the Fed to stop "spiking the punch bowl" with accommodative policy. The Fed may need to end its $600 billion bond-buying program earlier than its expected end in June, Fisher said.</p>
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Fed officials are aware of the need to ease up on the policy gas pedal at the appropriate time, and has a "suite of tools" to help, Yellen said.</p>
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In particular, purchases of securities beyond the level the Fed has committed to could raise doubts about the Fed's ability to exit gracefully.</p>
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"That could lead to an undesired rise in inflation expectations," she said. A precise communications strategy will be key to guiding market expectations, Yellen noted.</p>
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Yellen said the Fed's policies in the wake of the 2008 financial crisis -- slashing interest rates to the bone, and then committing to buy more than $2 trillion in government bonds and mortgage debt -- had been on point, especially in heading off a potential deflationary spiral.</p>
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Studies suggest the underlying U.S. inflation rate is now a percentage point higher than it would have been if the FOMC had not gone ahead with quantitative easing.</p>
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The latest reading on the Fed's preferred inflation gauge showed it was up 1.6 percent year on year, still below the 2 percent comfort zone held by many Fed officials.</p>
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Still, many Fed officials now fear inflation could start to accelerate as rising commodity prices flow into the U.S. economy through higher food and energy costs.</p>
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(Reporting by Ros Krasny; Editing by Todd Eastham)</p>
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