Can't have loose policy for too long: Federal Reserve

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The US economy will grow into next year and accommodative 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.

"I feel sanguine the economy will grow into next year," she said in 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 US stocks were overvalued.

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

But whether or not interest rates should be set according to asset prices is still an open question, she said in a speech given earlier.

"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 behaviours 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 QE measures) further," she said. "There is no plan B."

Last week in a speech, Yellen called into question the strength and durability of the US economy, which expanded in the third quarter for the first time in more than a year.

She also said deflation remained more of a near-term threat than inflation, a view reflected among many Fed officials.