By Howard Schneider and Ann Saphir

DALLAS The U.S. Federal Reserve can "proceed carefully" in deciding whether any further increases are warranted in its benchmark policy rate of interest, Fed Vice Chair Philip Jefferson said on Monday, nodding to the recent rise in long-term U.S. bond yields as one of the factors that have left the U.S. central bank at a "sensitive" juncture in its management of monetary policy.

"We are in a sensitive period of risk management, where we have to balance the risk of not having tightened enough, against the risk of policy being too restrictive," Jefferson said in his most substantive remarks since winning U.S. Senate approval as the Fed's second ranking leader behind Chair Jerome Powell.

The Fed "is in a position to proceed carefully in assessing the extent of any additional policy firming that may be necessary" to slow inflation to its 2% target, Jefferson said in an address at the National Association for Business Economics convention, highlighting the influence that higher market interest rates and the delayed effect of monetary policy on things like corporate bond refinancing will play in deciding "whether" another rate increase is needed.

While inflation remains too high, with factors including a still-strong economy and job market and possible spikes in energy costs that could push it higher again, Jefferson said that risk management was "a good reason for holding the policy rate constant at our most recent (Federal Open Market Committee) meeting."

The Fed held rates constant at a range of from 5.25% to 5.5% at its September meeting, though a majority of policymakers at the time felt one more rate increase would be needed by the end of the year.

Since then, however, the pace of underlying inflation has continued to slow, despite better-than-expected job and economic growth, while a rapid jump in market-based interest rates has led to a broad tightening of financial conditions that could slow the economy without further action by the Fed.

That rise in yields, Jefferson said, could be because investors see the resilience of the economy and feel the Fed may need to keep its own short-term policy rate higher for longer than expected.

"But I am also mindful that increases in real yields can arise from changes in investor’s attitudes toward risk and uncertainty. Looking ahead, I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy," Jefferson said.

(Reporting by Howard Schneider; Editing by Andrea Ricci)