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--Updates 08:00ET Story To Add Comments on Republican Tax Proposal
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. 
     She largely dodged questions seeking her opinion on the impact of the
Republican tax cut plan on the economic outlook, saying only that she was "very
worried" about the sustainability of the U.S. debt trajectory and the literature
was unclear on whether cuts to cost of capital for firms translates to increased
investment which might filter through to higher wages. 
     Asked by Sen. Mike Lee, R-Utah, about the idea that the Fed would respond
to tax cuts with aggressive rate hikes, Yellen said: "The Fed is not trying to
stifle growth. We are worried about trends that could push inflation above our
2% objective."
     At the moment, policy is 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." Policymakers are seeing "modest upward pressure" on
wages, but the gains remain modest, a signal that the economy is not overheated,
the chair said. 
     On the other hand, 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 still expect inflation to stabilize around 2% over the
medium term, Yellen 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% 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$$$,MT$$$$]