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 In her speech Yellen gave no direct hint about whether she
anticipates more than one rate hike over the Fed's four remaining
meetings of 2015. But her focus on domestic economic developments
looked beyond recent market turbulence over Greece and China, and
keeps the Fed's plans on track.
She said she expects the economy should grow steadily for the
remainder of the year, allowing the Fed to move ahead with its first
rate hike in nearly a decade.
"I expect it will be appropriate at some point later this year to
take the first step to raise the federal funds rate and thus begin
normalizing monetary policy," Yellen said in a speech to the City
Club of Cleveland, a civic group that sponsors high-level speakers.
"But I want to emphasize that the course of the economy and
inflation remains highly uncertain...We will be watching carefully
to see if there is continued improvement in labor market conditions,
and we will need to be reasonably confident that inflation will move
back to 2 percent in the next few years."
U.S. Treasury yields rose and the dollar rallied against a basket of
currencies after Yellen's remarks, while stocks modestly pared
gains.
Despite the improvement of recent years, she said labor markets
remain out of line, with high levels of part-time work and weak
participation rates.
The low unemployment rate "does not fully capture the extent of
slack," she said. "I think a significant number of individuals still
are not seeking work because they perceive a lack of good job
opportunities and that a stronger economy would draw some of them
back into the labor force."
Analysts saw Yellen's comments deviating little from the central
bank's recent policy statement. Though global markets have been
turbulent in recent weeks since the Fed's June meeting, Yellen
focused on U.S. growth she feels is likely to continue and will push
the economy closer to the Fed's full-employment and 2 percent
inflation goals.
"If the economy continues to improve, the Fed will raise rates this
year. It clearly wants to," said Jim McDonald, chief investment
strategist at Chicago-based Northern Trust Asset Management.
Yellen's remarks come less than a week before she is to appear
before Congress for a biannual briefing on monetary policy, and as
the central bank approaches a likely rate hike decision.
It is a step that will have global implications, putting the Fed on
a path separate from central banks in Europe and Japan that continue
fighting economic crises, and potentially drawing capital out of
developing economies.
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According to the individual economic projections released by Fed
officials at their June meeting, there was a roughly even divide
between those who expect only one interest rate increase this year -
and might thus be prepared to wait until late in the year to hike -
and those who expect two and would want to move sooner.
Yellen's position on that point remains uncertain, though her
influence as chair is likely pivotal in the ultimate decision.
Fed officials seem to have set the stage for an initial increase as
early as September. But recent events - the stock market collapse in
China and the confusion in Greece in particular - have raised fresh
concerns over how the world economy may hurt U.S. growth. Investors
now believe an initial hike is not likely until next year.
The Fed has kept rates near zero for almost seven years.
Though it will likely take years for the central bank to gradually
return rates to more normal levels, the initial step - "liftoff" -
has attracted outsized attention as a symbol that the Fed is ready
to declare the crisis over.
Yellen said she felt that initial step will have a small impact, and
that the Fed would be raising rates only gradually from that point
on.
Yellen said she agreed that a slow start to the year was likely the
result of temporary factors, such as low oil prices undercutting
investment in the U.S. energy sector, and a rising dollar pushing up
the international price for U.S. exports.
But she also said the economy faced constraints that could hold it
back, from a still underperforming housing market to the unresolved
crisis in Greece.
(Reporting by Howard Schneider and Ann Saphir; Additional reporting
by Ryan Vlastelica in New York; Editing by Andrea Ricci)
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