Fed's Yellen: US economy needs only 'gradual' rate hikes

Federal Reserve Chair Janet Yellen said Wednesday that even as the US economy grows stronger and employment expands, she foresees only "gradual" interest rate increases in the next few years.

Facing sometimes tough questions from legislators, Yellen presented the Fed's required semi-annual report to Congress -- possibly for the last time if President Donald Trump decides not to reappoint her for a second term at the helm of the US central bank.

She cautioned that possible changes in the administration's economic policy and spending are a "source of uncertainty" in the country's economic outlook.

Another big unknown is whether stubbornly low inflation will finally move closer to the Fed's two percent target rate, from the current 1.4 percent.

Sluggish US inflation and wage increases have baffled and worried economists given the very low unemployment rate, which would normally drive prices and earnings higher.

But Yellen once again expressed the view held by many US central bankers that the low pace of price increases is "partly the result of a few unusual reductions in certain categories of prices," such as cell phone service and prescription medicines.

The Fed is watching developments carefully, she told the House Financial Services Committee during the first of two days of testimony on Capitol Hill. She appears before the Senate Banking Committee on Thursday.

While such low inflation normally would keep the Fed from raising interest rates, it has instead hiked rates twice so far this year, and expects to do so once more.

- 'Gradual rate hikes' -

Yellen cautioned that although the Fed's measure of inflation has been low recently, "it's premature" to say it is not on track to return to two percent.

However, the Fed would reconsider its policy if inflation continues to undershoot, she said.

Amid signs that "growth rebounded in the second quarter," Yellen said, "additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion."

But she said the benchmark lending rate probably will not "rise all that much further."

Shortly after her testimony, the Fed released a report on the economy showing most US regions saw "slight to moderate" growth in June, and few signs of price pressures, even while some firms report having to offer higher wages to attract qualified workers.

The anecdotal reports from around the country show most areas expected "modest to moderate gains" in the coming months.

Yellen stressed in the hearing that "monetary policy is not on a pre-set course," and central bankers will adjust their views as more data becomes available.

She noted that there are various sources of uncertainty about the economic outlook, including "possible changes in fiscal and other government policies here in the United States."

Yellen would not comment on specific policies, but economists have noted that Trump's promised burst of infrastructure spending could spur growth, while restrictive trade policies or a rising deficit could have the opposite effect.

- Political interference -

The most contentious exchange in the three-hour hearing came when Republican Congressman Bill Posey pressed Yellen on the need to audit the Fed, including a review of its policy moves.

Yellen rejected the concept, saying it would mean political influence on the independent central bank's decisions.

She said she was "strongly opposed" to the proposed legislation, that would in her view would subject the Fed to "real-time policy reviews" of monetary policy decisions "that should be technical, professional and nonpartisan."

Central bankers need to be able to "have honest conversations ... without having political influence brought to bear in second-guessing of decisions," and even eventual pressure to reverse those decisions, she said.

"That is the essence of Federal Reserve independence."

- Second term -

Asked repeatedly whether she would serve a second four-year term at the helm of the Fed after her term expires on February 3, 2018, Yellen declined to say.

"I'm very focused on trying to achieve our congressionally-mandated objectives and really haven't had time to give further thought at this point to this question," she said.

According to a report in Politico published Tuesday, White House economic advisor Gary Cohn -- a Goldman Sachs alumni who is not an economist -- is likely to get the Fed job if he wants it.

The story, citing four people close to the process, said Trump might reappoint Yellen, despite previous criticism of her handling of monetary policy, but Cohn is a probable choice and would sail through the congressional confirmation.

Yellen also is serving a 14-year term as a member of the board, which runs until January 31, 2024, but Fed chairs who are not renominated typically resign from the board as well.