Fed's Yellen says too soon to start reversing policy

By Ros Krasny

NEW HAVEN, Connecticut (Reuters) - The U.S. economy is still not strong enough for the Federal Reserve to start reversing its extremely accommodative monetary policy, a top Fed official said on Saturday.

"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.

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.

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.

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.

In particular, purchases of securities beyond the level the Fed has committed to could raise doubts about the Fed's ability to exit gracefully.

"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.

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.

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.

(Reporting by Ros Krasny; Editing by Todd Eastham)