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

By Nick Timiraos Features Dow Jones Newswires

Federal Reserve Chairwoman Janet Yellen said Thursday a stronger 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, which Ms. Yellen again cited on Thursday in testimony to the Senate Banking Committee.

But Ms. Yellen cited the inherent uncertainty behind the past three months of muted price pressures. "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%.

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 returned to Capitol Hill Thursday for a second day of testimony on the economy, monetary policy and financial regulation, this time before the Senate Banking Committee. She largely stuck to the overview she gave Wednesday to the House Financial Services Committee.

She said Wednesday that the central bank planned to proceed with gradual interest-rate increases in the coming years and is likely to start shrinking its $4.5 trillion portfolio "relatively soon" this year.

The hearing Wednesday showed how the political dynamic facing the central bank could shift with Republicans in control of the White House and with the Fed farther along in its plans to raise rates and shrink its balance sheet.

Ms. Yellen's appearance before the House panel was less contentious than prior hearings, in which Republicans have unsparingly challenged the central bank leader over everything from institutional accountability to its economic forecasts. Democrats, meanwhile, appeared less willing Wednesday to offer unconditional support for the Fed's stance toward gradually providing less support to the economy, though many extolled Ms. Yellen's leadership of the bank.

The appearances in front of both panels could be her last before her term expires in February. The White House is beginning the process of considering who should be the next Fed leader. While Ms. Yellen isn't expected to be reappointed, President Donald Trump hasn't ruled it out.

Asked repeatedly whether she wants to serve a second term, Ms. Yellen initially demurred on Wednesday and implied she hadn't discussed the matter with the White House. Later, when asked what she would say if Mr. Trump offered her another term, she said, "It is certainly something that I would discuss with the president, obviously."

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

(END) Dow Jones Newswires

July 13, 2017 11:11 ET (15:11 GMT)