Yellen stresses employment, inflation in Fed's coming tightening decision

The Federal Reserve's still distant decision to raise interest rates will depend on how far the U.S. economy remains from the central bank's employment and inflation goals, and how long it will likely take to meet them, Fed Chair Janet Yellen said on Wednesday.

Yellen, in her second public speech as Fed chair, largely restated the U.S. central bank's stance, stressing that it would respond to shifting economic conditions as it judges when to finally tighten monetary policy after years of unprecedented stimulus.

The Fed, frustrated with the slow U.S. recovery from the 2007-2009 recession, aims for maximum sustainable employment and a rise in inflation from just above 1 percent now to 2 percent.

"The larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained," Yellen told the Economic Club of New York.

This approach, she said, underscores the Fed's commitment to "maintain the appropriate degree of accommodation to support the recovery." The decision policy to tighten will not be based on any one economic indicator but on "a wide range of information on the labor market, inflation, and financial developments," she told the Wall Street constituency, a key one for the Fed.

The central bank has kept its key rate near zero since the depths of the financial crisis in late 2008.

Since then the Fed has tried an array of strategies to telegraph just how long it will wait to tighten policy, including tying the ultra-low rates to time periods, and later, to specific unemployment and inflation thresholds.

Last month the Fed rolled out its latest version of forward guidance, effectively promising not to raise rates for a "considerable time" after it halts its bond-buying program, which is being wound down and should end by December at the latest. But Yellen sowed more confusion when she then told a press conference that a "considerable time" means about "six months" or so.

On Wednesday Yellen did not mention the six-month recess in her speech.

The Fed chair repeated there is likely more so-called slack in the labor market than is suggested by the unemployment rate, which was 6.7 percent last month. That means that joblessness should fall further before wages start to push up inflation.

She also said inflation should rise as the slack diminishes, another theme she addressed in a speech last month in Chicago.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)