Yellen’s speech comes after relatively hawkish comments from other Fed officials, including Vice Chair Stanley Fischer as well as Kansas City Fed President Esther George, who had dissented in favor of a rate rise at the central bank’s July policy meeting.
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The moderate growth in the second quarter followed a sluggish pace of 0.8 percent in the first quarter, underscoring the weak performance of the world’s largest economy in the first half of 2016. Though she did not cite when a rate hike might come, she believes “the case for an increase in the federal funds rate has strengthened in recent months”.
Still Yellen declined to hint at whether the Fed might raise rates at its next policy meeting, September 20-21, or at its subsequent meetings in early November and mid-December.
Investors are now looking ahead to a report on U.S.jobs growth in August, a widely watched data point expected to be released next Friday.
Treasurys barely budged after the US government estimated that gross domestic product grew at a lackluster 1.1% annualized pace in the second quarter, revised down slightly from an earlier estimate but largely in line with expectations.
Yellen said that while the Fed’s support had been critical in supporting the economy, political leaders should considering using the government’s tax and spending powers as well.
The Fed raised rates in December, its first hike in almost a decade, but it has held off further increases so far this year due to a global growth slowdown, financial market volatility and an inflation rate persistently below its 2 percent target.
Initially, the United States dollar fell and shares rallied, as investors were soothed by her flagging that rates would stay lower than usual for longer and the Fed could resort to a fresh $US2 trillion asset purchases program to fight any recession.
The yield on the benchmark 10-year U.S. Treasury note TMUBMUSD10Y, -1.29% fell 1.7 basis points to 1.559%. But she stopped short of offering any timetable.
Yellen’s remarks kicked off a three day conference that this year is exploring whether monetary policy needs a fundamental overhaul in light of the 2008 global financial crisis, with papers exploring ideas like how to make it easier for central banks to impose negative interest rates.
Some economists have said they think conditions are ripe for the Fed to boost rates next month.
A low neutral rate constrains how high the Fed can lift rates without harming the economy and thus gives it less room to cut them in a downturn.
The upcoming USA elections could also influence things happening in the economy, Fischer said, but the central bank would only react to signals of uncertainty that might be reflected in the economic data it would not try to become a political forecaster. She said the Fed still planned to wind down its massive balance sheet, but that such an effort would take time.
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The Fed may also want to explore other options, including broadening the range of assets it can purchase, raising the inflation target, or targeting nominal GDP, she said.
