Fed's Yellen: Rate Increase Could Become Appropriate 'Relatively Soon'

Federal Reserve Chairwoman Janet Yellen on Thursday reiterated that an increase in short-term interest rates "could well become appropriate relatively soon," but offered no new signals about what the central bank will do at its meeting next month.

Officials decided to hold off on raising rates at their last meeting after judging that there was "somewhat more room" for the labor market to improve than officials had anticipated at the beginning of the year, Ms. Yellen said in prepared testimony she will deliver at a hearing on Capitol Hill Thursday morning. But she emphasized that policy must remain forward-looking.

Continue Reading Below

"Were the FOMC [Federal Open Market Committee] to delay increases in the federal-funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee's longer-run policy goals," Ms. Yellen told the Joint Economic Committee in her prepared remarks. "Moreover, holding the federal-funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability."

Ms. Yellen didn't make any comments about the results of the presidential election.

Fed officials have left their benchmark federal-funds rate unchanged this year after raising it in December 2015 to a range between 0.25% and 0.50%. Policy makers have signaled in recent weeks that they are closer to lifting rates again amid steady job growth, accelerating wage gains and signs of firming inflation. Fed officials will next meet on Dec. 13-14.

Ms. Yellen will begin testifying before the committee at 10 a.m. ET.

The Fed chief said officials' decision to leave rates unchanged last month "does not reflect a lack of confidence in the economy."

The pace of wage gains has stepped up recently, economic growth appears to have picked up from its subdued pace earlier in the year and consumer spending has continued to post moderate gains, Ms. Yellen said.

Average job growth so far this year is still well above estimates of the pace necessary to absorb new entrants into the labor force, she said. The labor-force participation rate has also held steady this year, reflecting that the economy has had "more room to run" than officials had anticipated, she said.

"While above-trend growth of the labor force and employment cannot continue indefinitely, there nonetheless appears to be scope for some further improvement in the labor market," she said, noting that the unemployment rate is still above where officials see it settling in the long run.

Further employment gains could help push the participation rate up further and help boost wages, she said. Ms. Yellen also said she was troubled by persistent disparities in jobless rates for whites and African-American and Hispanic workers, as well as racial gaps in the median household income.

Write to Kate Davidson at kate.davidson@wsj.com