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By Jean Yung
     WASHINGTON (MNI) - Federal Reserve Chair Janet Yellen on Wednesday recapped
recent U.S. monetary policy for Congress's Joint Economic Committee, saying the
central bank sees gradual interest rates increases as appropriate despite
inflation remaining "surprisingly subdued" this year. 
     She did not drop an explicit hint about the likelihood of another 25 basis
point increase in the Fed's key short-term interest rate when officials meet in
two weeks though the move is widely anticipated by investors. 
     "We continue to expect that gradual increases in the federal funds rate
will be appropriate to sustain a healthy labor market and stabilize inflation
around the FOMC's 2 percent objective," Yellen said in prepared remarks. 
     Policy remains accommodative with the fed funds rate sitting at a target
range of 1.00% to 1.25%, below officials' estimate of its longer run level of
2.75%. That rate, known as the neutral rate, "currently appears to be quite low
by historical standards," Yellen said. If it rises somewhat over time, as Fed
officials expect, "additional gradual rate hikes would likely be appropriate
over the next few years to sustain the economic expansion," she said. 
     The Fed chair painted a rosy picture of the economy overall, saying GDP
growth had "stepped up" this year in spite of the destructive hurricanes and the
labor market was "strong." But inflation remains below the Fed's target, as it
has for most of the past five years. Core inflation is at just 1.3% while
headline inflation is at 1.6%. 
     Most Fed officials continue to expect inflation to stabilize around 2% over
the medium term, she said, and they are keeping a close eye on its progress.  
     "In my view, the recent lower readings on inflation likely reflect
transitory factors. As these transitory factors fade, I anticipate that
inflation will stabilize around 2 percent over the medium term," Yellen said.
"However, it is also possible that this year's low inflation could reflect
something more persistent." 
     Over the long run, sluggish productivity growth and a slower expanding
labor market will weigh on overall economic growth, Yellen said. 
     "Congress might consider policies that encourage business investment and
capital formation, improve the nation's infrastructure, raise the quality of our
educational system, and support innovation and the adoption of new
technologies," she said. 
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com
[TOPICS: MMUFE$,M$U$$$]