March 25 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen said the central bank wants authority to issue its own debt, a move that would bolster its efforts to raise interest rates as the credit crisis abates.

The Fed normally raises interest rates by selling Treasuries on its balance sheet, draining reserves from the banking system. That task is tougher with the Fed’s commitment last week to buy more than $1 trillion in mortgage-backed securities, which are harder to sell quickly without roiling markets. The central bank cut its main rate to almost zero in December and switched its focus to emergency credit programs.

On the power to sell debt, “I would feel happier having it now” so the Fed could use that authority to adjust its balance sheet, Yellen told reporters today after a speech in New York. Even without that tool, “there is a great deal we can do,” she said, “but it would certainly be a nice thing to have.”

Yellen said she was unsure whether the central bank has formally requested authority to sell its own bonds or informed Congress it plans to make such a request.

Michelle Smith, a spokeswoman for the Fed’s Board of Governors in Washington, declined to comment.

The Fed and Treasury Department previously said they would seek legislation to help the Fed manage its assets, while giving few specifics.

“The Treasury and the Federal Reserve are seeking legislative action to provide additional tools the Federal Reserve can use to sterilize the effects of its lending or securities purchases on the supply of bank reserves,” the agencies said in a joint statement on March 23.

Fed Request

It’s not immediately clear whether Congress would support the Fed request, or what conditions lawmakers might seek to impose on the central bank in return.

A separate proposal to put the Fed in charge of market oversight is losing congressional support after its main backer, House Financial Services Committee Chairman Barney Frank, said criticism over American International Group Inc. “undercuts” his proposal.

Yellen, 62, is a former Fed governor who also served as chairman of the Council of Economic Advisers under President Bill Clinton from 1997 to 1999. She has been president of the San Francisco Fed bank, which covers the biggest economy of the Fed’s 12 regional banks, since 2004.

In her speech, Yellen said there are “several exit strategies” for the Fed to raise interest rates once the economy recovers, even while it keeps a “large balance sheet to support credit markets.”

Shrinking Size

“Issuing such debt would reduce the volume of reserves in the financial system and push up the funds rate without shrinking the total size of our balance sheet,” Yellen said.

The Fed explored the idea with lawmakers last year while seeking ways to manage a balance sheet that has more than doubled in the past year.

The Treasury, which has a legal limit on the amount of debt it can sell, abandoned new issues of bills to finance the Fed in mid-November. Debt issuance would offer the Fed a funding source other than creating money.

Having the tool to sell its own bonds would enable the Fed to counter concerns that it might be unable to contain inflation once the economy recovers.

“For all the people sitting here expressing their concern about how will we avoid inflation, it would be nice to have that tool and be able to say, ‘Look, when the time comes, we’ve got this and we can use it in an unlimited sense,’” Yellen told reporters.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Michael McKee in New York at mmckee@bloomberg.net.

Last Updated: March 25, 2009 17:46 EDT