U.S. Federal Reserve Chair Janet Yellen said that more interest rate increases will be appropriate if the U.S. economy meets the central bank’s outlook of gradually rising inflation and tightening labor markets.

    “At our upcoming meetings, the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” she told the Senate Banking Committee in prepared remarks Tuesday.

    Yellen’s semiannual report on monetary policy is her first since Donald Trump became president vowing to boost U.S. growth, which could push the Federal Open Market Committee (FOMC) to pick up the pace of rate hikes if such steps fan higher inflation. She reiterated that falling behind on inflation could harm to the economy and possible cut short the expansion.

    “Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” she added.

    Yellen gave no indication of the timing of the next hike in her prepared remarks. Investors see about a 34 percent chance of an increase at the next meeting of the FOMC on March 14-15, up from about 30 percent before she spoke.

    The Fed, which has only raised rates twice since the recovery began in 2009, has penciled in three quarter-point rate increases in 2017, as the economy closes in on the central bank’s goals for maximum employment and 2 percent inflation.

    Yellen said the Fed panel’s outlook for a “moderate pace” of growth is based on continued stimulative monetary policy, and a pick-up in global activity. She did not mention Trump administration proposals as a key element in the central bank’s forecast.

    In response to questioning, Yellen said Fed policymakers will be discussing in coming months their strategy for the balance sheet, which swelled to about US$4.5 trillion after the crisis from less than US$900 billion in 2006 as the central bank sought to hold down long-term market rates.

    She said she expects the balance sheet to end up being “substantially smaller” than it is now, with policymakers wanting to shrink in an “orderly and predictable way.”

    “The Fed doesn’t want to use the balance sheet as an active policy tool and it should eventually be comprised primarily of U.S. Treasuries,” she said.

    On the economy, she said in her opening statement that consumer spending has continued to rise at a “healthy pace,” supported by gains in household income and wealth, favorable sentiment and low rates. The recent rise in mortgage rates “may impart some restraint” on housing markets, she said.

    The Fed chief said changes in fiscal and economic policies could affect the outlook, though she declined to speculate how, adding that it’s “too early to know” what policy changes will be put in place. She urged lawmakers to focus on investments that would improve living standards and raise productivity while noting that she hoped any changes would keep fiscal accounts “on a sustainable trajectory.”

    Trump’s victory could expose the U.S. central bank to reforms favored by his Republican party, which still controls both chambers of Congress. Yellen could previously rely on President Barack Obama, a Democrat, to shield with his veto any perceived encroachment on Fed independence. (SD-Agencies)