By Martin Crutsinger
AP Economics Writer
WASHINGTON (AP) - While unemployment has fallen significantly and inflation is starting to tick higher, Federal Reserve Chair Janet Yellen said last Thursday she does not believe that the central bank has fallen behind the curve and needs to start pushing interest rates up more quickly.
But Yellen acknowledged that it would be "risky and unwise" to allow the economy to overheat by keeping interest rates too low for too long.
In a speech at Stanford University, Yellen said she believes the central bank is on the "prudent" course of gradually raising rates.
Yellen said the Fed's approach should improve prospects that the economy will achieve sustainable growth, with the labor market operating at full employment and inflation running close to the central bank's 2 percent target.
The Fed last month boosted its benchmark rate by a quarter-point to a new range of 0.5 to 0.75 percent. It was only the second rate hike in the past year, following an initial quarter-point move in December 2015.
The Fed also has indicated it expects another three rate hikes in 2017, while stressing that any rate moves would depend on how the economy performs.
Some private economists have predicted that the Fed will accelerate its rate hikes this year if the incoming Trump administration is successful in getting Congress to approve tax cuts and other measures to boost economic growth.
Yellen said that the goal for the Fed was to move rates up gradually until reaching its so-called natural rate, the spot where it is not providing additional stimulus to the economy or holding growth back.
In a speech in San Francisco last Wednesday, Yellen said she expected the Fed would raise its benchmark rate, the federal funds rate, "a few times a year" until officials had pushed the rate to close to 3 percent by the end of 2019.
Yellen did not expand on that view in her last Thursday speech, but she did explore the use of various formulas to guide the Fed's in its rate decisions. There is legislation being pushed by Republicans in Congress that would require the Fed to establish a formula for raising rates and explain any deviation from that formula.
Yellen opposes this approach, saying it would not improve monetary policy decisions and could lead the central bank to make mistakes that would harm the economy.
Yellen reiterated that position in last Thursday's speech, while noting the Fed routinely looks at various monetary formulas to help guide its decisions.
"Simple policy rules can serve as useful benchmarks to help assess how monetary policy should be adjusted over time," Yellen said.
But she said, "The rules should not be followed mechanically, since doing so could have adverse consequences for the economy."
Published: Mon, Jan 23, 2017
