Federal Reserve Chair Janet Yellen said the U.S. economy should continue to expand over the next few years, allowing the central bank to keep raising interest rates, while also stressing the Fed is monitoring too-low inflation.
“Considerable uncertainty always attends the economic outlook,” Yellen said Wednesday in remarks prepared for delivery to the U.S House Financial Services Committee. “There is, for example, uncertainty about when — and how much — inflation will respond to tightening resource utilization.”
Yellen is scheduled to begin her remarks at 10 a.m., followed by a question-and-answer session with lawmakers. She repeats the performance Thursday before the Senate Banking Committee, wrapping up her final testimony to Congress as Fed chair, unless she is re-nominated by President Donald Trump. Yellen’s current term expires on Feb. 3.
Yellen emphasized in her remarks that the central bank is on alert about prices remaining below the central bank’s 2% target. Other members of the Federal Open Market Committee have mentioned similar concerns in recent days.
“The committee will be monitoring inflation developments closely in the months ahead,” she said.
Nevertheless, the Fed chair said, the baseline outlook is for levels of interest rates to continue to support job gains and income growth and therefore consumer spending.
A faster pace of global growth should support U.S. exports, she said, and a recovery in drilling activity should support business investment.
“These developments should increase resource utilization somewhat further, thereby fostering a stronger pace of wage and price increases,” she said.
Yellen said the central bank’s policy rate “would not have to rise all that much further” to get to a rate that keeps supply and demand in balance in the economy. Eventually, “factors,” which she did not specify, holding down the so-called neutral rate will diminish over time, she said, which supports the Fed’s case for continued rate hikes over the next couple of years.
She also mentioned that the Fed anticipates it will start reducing its balance sheet “this year.” The size of the balance sheet once this process has been completed is uncertain, she said, partly because the banking system’s demand for reserves is not yet known.
Yellen said low readings on inflation are partly the result of “a few unusual reductions” in certain price categories which will hold 12-month inflation down until they drop out of the calculation. However, she also said there is uncertainty about inflation’s response to tightening resource use.
She noted that the FOMC said in June it will “carefully monitor actual and expected progress” toward its inflation goal.
Inflation has been below the central bank’s 2% target for most of the past five years.
With U.S. economy growing at a steady pace, Yellen’s Fed is gradually pulling back from crisis-era stimulus. It raised interest rates in June for a second time this year and forecast another hike in 2017.
The U.S. expansion is in its ninth year and continues to create jobs without much inflation. Unemployment was 4.4% in June and employers have added 187,000 jobs a month on average over the past 12 months. But stronger demand for labor hasn’t fed into higher wages.
