REPEAT:Fed's Yellen Tells Congress Gradual Rate Hikes Approp

Repeats Story Initially Transmitted at 13:00 GMT Nov 29/08:00 EST Nov 29

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