Yellen Says Low Inflation Could Lead to Slower Pace of Rate Rises -- 2nd Update

Federal Reserve Chairwoman Janet Yellen on Tuesday defended the central bank's projection for a gradual path of interest-rate increases over the next few years even though she said low inflation, if it persists, could lead to a slightly slower pace of rate rises.

Ms. Yellen and her colleagues have been grappling with subdued inflation growth for much of the year despite a growing economy and vigorous labor market. That has presented officials with a dilemma. From one point of view, the weak inflation readings could be a sign that interest rates should remain lower than anticipated. Yet keeping interest rates low for too long could cause inflation to grow too rapidly and inflate new financial bubbles.

Inflation, under the Fed's preferred measure, has undershot the central bank's 2% target for much of the past five years. Although Ms. Yellen said she expects inflation to gradually move up to the target, she acknowledged the uncertainty surrounding that prediction.

"How should policy be formulated in the face of such significant uncertainties? In my view, it strengthens the case for a gradual pace of adjustments," Ms. Yellen said in remarks prepared for delivery at an economic conference in Cleveland. "It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent."

Moving too quickly could slow growth unnecessarily, she said. "But we should be wary of raising rates too gradually," she added. Moving too slowly could create an inflationary problem down the road that might be difficult to overcome without triggering a recession," she said.

Still, the Fed's understanding of inflation is "imperfect," she said, "and we recognize that something more persistent may be responsible for the current undershooting."

"We will monitor incoming data closely and stand ready to modify our views based on what we learn," she said.

It could be, Ms. Yellen said, that the labor market still has a way to go before it has fully healed from the recession. Or inflation expectations, which affect actual inflation, might have weakened.

Those conditions, she said, could "result in a policy path that is somewhat easier than that now anticipated."

It also could be that something has fundamentally changed in the economy either globally or in the U.S. that will hold down price growth, she said.

Write to David Harrison at david.harrison@wsj.com

(END) Dow Jones Newswires

September 26, 2017 13:15 ET (17:15 GMT)