Yellen Says Premature to Conclude Inflation Trend Falling Short

  • Fed chair sees ‘two-sided’ risks to the inflation outlook
  • Repeats view a tightening labor market will lift wages, prices

Federal Reserve Chair Janet Yellen discusses U.S. inflation expectations during testimony before the Senate Banking Committee. (Source: Bloomberg)

Federal Reserve Chair Janet Yellen said she had not yet concluded that recent weak readings on inflation were a sign that it would fail to rise to the Fed’s 2 percent target, and the U.S. central bank remained on track to continue raising interest rates at a gradual pace.

“It is premature to conclude the underlying inflation trend is falling well short of 2 percent,” Yellen told the Senate Banking Committee on Thursday in Washington. “I haven’t reached that conclusion.”

Yellen was delivering semi-annual testimony to Congress for the last time unless President Donald Trump offers her a second stint at the helm of the central bank. Her current term as Fed chair expires on Feb. 3 and analysts expect Trump will pick someone from his Republican party for the top job in economics. Yellen was appointed by President Barack Obama, a Democrat.

The U.S. expansion is in its ninth year and continues to create jobs without much inflation. Unemployment was 4.4 percent 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 and three straight months of softer inflation data have led to calls for the Fed to pause policy tightening.

Noting the tightness of the labor market, Yellen said the U.S. may start to see higher wages and prices as economic slack shrinks and called the risks to inflation “two-sided,” which explained why policy makers “have felt that it probably remains prudent to remain on a gradual path of rate increases.”

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 and said it expected to start shrinking its $4.5 trillion balance sheet.

— With assistance by Daniel Flatley, and Craig Torres

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