Yellen: Premature to Conclude Inflation Trend Is Falling Well Short of Target -- Update

By Nick Timiraos Features Dow Jones Newswires

Federal Reserve Chairwoman Janet Yellen said Thursday a strong labor market and rising prices of imported goods supported her expectation that a recent downturn in inflation would prove transitory.

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In raising interest rates last month and penciling in one more increase later this year, Fed officials have so far looked past recent soft inflation readings by pointing to several idiosyncratic price declines, such as for wireless phone plans.

Ms. Yellen cited those factors again in testimony to the Senate Banking Committee on Thursday, but also nodded to inherent uncertainty in near-term inflation figures. "There may be more going on. We're watching inflation very carefully in light of low readings," she said. "I think it's premature to conclude that the underlying inflation trend is falling well short of 2%. I haven't reached such a conclusion."

Fed officials next meet July 25-26 and are likely to leave short-term interest rates unchanged. At their meeting last month, officials raised rates for the third time in as many quarters to a range between 1% and 1.25%.

While the economy has largely performed in line with the central bank's forecasts, inflation has been weaker than expected. Excluding volatile food and energy categories, the Fed's preferred inflation gauge slowed to a gain of 1.4% over the year ended May, versus 1.8% in February. The Fed has fallen short of its 2% inflation target for most of the past five years.

Ms. Yellen cited rising import prices on Thursday as one reason why global factors aren't "mainly responsible" for the low inflation readings. She also pointed to continued declines in labor market slack, which would traditionally point to rising wages. "We're not seeing very substantial upward pressure on wages, but we may begin to see upward pressure on wages and prices," she said.

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Ms. Yellen said little about the timing of the Fed's next moves. Most economists polled recently by The Wall Street Journal expect the central bank to start shrinking its $4.5 trillion holdings of bonds and other assets in September, and next raise short-term interest rates in December. That would allow officials to monitor inflation trends for several months before deciding whether to lift borrowing costs.

The central bank leader offered her assessments on a range of other topics Thursday:

-- On her future at the Fed: Ms. Yellen implied she hadn't discussed with the White House whether President Donald Trump might want to nominate her to continue as chairwoman after her term ends next February. "It's not been something that's come up," she said. If Mr. Trump asked her to stay on, that is "something that I would discuss with the president, obviously."

-- On the likelihood of another financial crisis: Ms. Yellen clarified comments she made in London last month when she said she didn't believe there would be another financial crisis "in our lifetimes." On Thursday, she said, "We can never be confident that there won't be another financial crisis," but she pointed to postcrisis changes to bank capital and regulatory standards that had made the financial sector more resilient to economic shocks.

-- On the prospects for 3% annual U.S. economic growth: "I'd love to see it," Ms. Yellen said. The Trump administration has said it believes its policies can boost growth to that level. Ms. Yellen said the goal, which would require a large rebound in productivity, "would be quite challenging."

-- On the length of the U.S. economic expansion, currently the country's third longest on record: "There are shocks that impact the economy, and a negative shock could end the expansion," she said. "But I don't see anything inherent in the nature of the expansion that suggests it will come to an end anytime soon."

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

July 13, 2017 15:05 ET (19:05 GMT)