By Kristina Cooke

NEW YORK, June 26 (Reuters) - The U.S. Federal Reserve's baby steps this week toward scaling back some of its emergency market lifelines underscore just how far off an interest rate hike actually is.

The U.S. central bank on Thursday dropped a liquidity program for money markets and trimmed the size of a handful of other facilities. But it largely kept its liquidity safety-blanket in place, extending the life of most programs on the expectation that financial strains will remain for some time.

These emergency programs were put in place after fear of huge losses in the financial crisis froze key credit markets and are only authorized under a section of the Federal Reserve Act if conditions are "unusual and exigent." By extending them until February of next year, the Fed suggested it expects markets to remain vulnerable until then.

"It is extremely difficult to argue that the presence of such circumstances could be consistent with a decision to hike the federal funds rate," Goldman Sachs economists said in a research note. No economists in a Reuters poll of primary dealers taken after a Fed policy meeting on Wednesday saw the U.S. central bank hiking interest rates before 2010. [FED/R]

Analysts and investors have been questioning how the Fed, which has pumped more than $1 trillion into strained credit markets since the crisis struck, will reverse course once a recovery gains steam.

Any "exit strategy" would require a delicate balance: removing extra liquidity too soon could squash a recovery, but moving too slowly could spawn inflation. It is a topic that looks set to grow in contention among policymakers as the economy heals.

TOO SOON TO TIGHTEN

If the Fed had decided not to extend the bulk of these emergency facilities past their previously scheduled expiry in October, it likely would have been perceived as a first step toward tightening monetary policy -- something the Fed has stressed it is not yet ready to do. This way, they only trimmed those facilities that were seeing "very weak demand."