By Ros Krasny

In a bookend to an earlier speech in which Yellen threw her support behind a huge fiscal stimulus package to boost economic growth, the policy-maker said the Fed was far from out of ammunition on the monetary side.

The Fed's programs already announced or put in place "have improved liquidity in the money markets and lowered the cost of private credit," Yellen said in remarks prepared for a panel discussion at the American Economics Association annual meeting in San Francisco.

"Conditions are still abnormal, but money market functioning has clearly improved relative to the dark days of last September and October."

From here, asset purchases and lending programs could be expanded and extended to additional sectors impacted by the credit crunch, Yellen said.

The panopoly of programs has blown the Fed's balance sheet up to more than $2.2 trillion -- and still rising -- from about $900 billion at the start of 2008.

"As the nation's central bank, the Fed can issue as much currency and bank reserves as required," Yellen said.

Still, the Fed needs to ensure that it has an "exit strategy" to wind down its various programs in a timely way when they are no longer needed, she said.

PROBLEMS OF THE ZERO BOUND

In December, the policy-setting Federal Open Market Committee lowered the federal funds rate essentially to its "zero bound" by establishing a target range of zero to 0.25 percent and noting an expectation that rates would stay at exceptionally low levels for some time.

"This move ... by no means exhausts the Fed's options to stimulate the economy through other measures," Yellen said.

"Considerable scope for action" remains in the use of nonconventional programs that use an expansion of the Fed's balance sheet as a lever to improve the functioning of financial markets, she said.

Yellen said the looming forces of deflation mean the Fed must clearly explain what it can do to pull the United States out of recession, given the policy constraints created by the zero-bound on interest rates.

"By clearly communicating the Fed's commitment to low and stable inflation and by backing that commitment up with determined policy actions should the need arise, any deflationary pressures caused by the weak economy can be contained," she said.

Of the "interventions" done by the Fed recently, Yellen said the program to buy $600 billion in agency debt and agency-insured mortgage-backed securities "could provide significant support to the housing sector," seen as one of the prerequisites to a U.S. economy recovery.

The approach employed by another new Fed program, the Term Asset-Backed Securities Loan Facility "can be expanded substantially, with higher lending volumes and additional asset classes," she added.

"The FOMC could also expand its purchases of longer-term Treasury debt," Yellen said, echoing recent comments from Fed Chairman Ben Bernanke.

Yellen said the Fed's evolving targeted approach differed from the quantitative easing policy pursued by the Bank of Japan in the early 1990s, which she said "had little effect on bank lending or on the economy more broadly."

(Editing by Leslie Adler)