Janet Yellen sees more rate hikes needed if economy stays on course

Federal Reserve Chair Janet Yellen arrives on Capitol Hill in Washington, to testify before the Senate Banking Committee. Photo / AP

Federal Reserve Chair Janet Yellen said more interest-rate increases will be appropriate if the economy meets the central bank's outlook of gradually rising inflation and tightening labour markets.

"At our upcoming meetings, the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," she told the Senate Banking Committee in prepared remarks Tuesday.

Tuesday's semiannual report on monetary policy is her first since Donald Trump became president after vowing to boost U.S. growth, which could push the Federal Open Market Committee to pick up the pace of rate hikes if such steps fan higher inflation.

"Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession," she added.

Yellen gave no indication of the timing of the next hike in her prepared remarks. Investors see about a 30 per cent chance of an increase at the next meeting of the FOMC on March 14-15.

The Fed, which has only raised rates twice since the recovery began in 2009, has pencilled in three quarter-point rate increases in 2017, as the economy closes in on the central bank's goals for maximum employment and 2 per cent inflation.

Yellen said the Fed panel's outlook for a "moderate pace" of growth is based on continued stimulative monetary policy, and a pick-up in global activity. She did not mention Trump administration proposals as a key element in the central bank's forecast.

Consumer spending has continued to rise at a "healthy pace," she said, supported by gains in household income and wealth, favourable sentiment and low rates. The recent rise in mortgage rates "may impart some restraint" on housing markets, she said.

The Fed chief said changes in fiscal and economic policies could affect the outlook, though she declined to speculate how, adding that it's "too early to know" what policy changes will be put in place. She urged lawmakers to focus on investments that would improve living standards and raise productivity while noting that she hoped any changes would keep fiscal accounts "on a sustainable trajectory."

Trump's victory could expose the U.S. central bank to reforms favoured by his Republican party, which still controls both chambers of Congress. Yellen could previously rely on President Barack Obama, a Democrat, to shield with his veto any perceived encroachment on Fed independence.

The shift in power may force her to engage more with lawmakers than in the past. Republicans want to roll back post-crisis banking regulations enshrined in the Dodd-Frank Act, arguing it hurts growth by making credit scarce for small businesses. Yellen did not mention financial regulation in her remarks.

In his opening remarks at the hearing, Senate Banking Committee Chairman Mike Crapo said "it is time to reassess what is working and what is not" with financial regulations, which need to "strike the proper balance" between the safety of the system and economic growth.

Trump's opportunity to influence regulatory policy improved last week when Fed Governor Daniel Tarullo, who oversees bank regulation, announced his departure in early April. It also means that Trump can fill three of the seven Fed Board seats, where there are two existing vacancies, while Yellen's own term as chair ends in February 2018.

Yellen gave an upbeat description of the labor market saying gains in recent years "have been widespread." The unemployment stood at 4.8 per cent in January.

The personal consumption expenditures price index, the Fed's preferred price benchmark, rose 1.6 per cent in the 12 months through December.