Inflation concerns remain despite US recovery, says Yellen

Low inflation remains a concern for US economy, US federal reserve chairman Janet Yellen warned on Wednesday, despite delivering an upbeat assessment of the US economy.

In what she acknowledged could be her last appearance before Congress Ms Yellen predicted that the US economy would continue to grow over the next few years, allowing the central bank to continue raising interest rates.

But she said it was unclear when inflation would start to pick up in response to the strengthening economy.

“Considerable uncertainty always attends the economic outlook,” she told the House of Representatives financial services committee. “There is, for example, uncertainty about when – and how much – inflation will respond to tightening resource utilisation.”

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While Ms Yellen said that “additional gradual hikes” in interest rates are “likely to be appropriate over the next few years”, she gave little away in terms of timing. The federal reserve has raised interest rates three times since December, and many analysts believe a further hike is imminent in the autumn.

However, inflation has failed to return to the Fed’s 2 per cent target, a persistent concern for the US central bank.  Ms Yellen said the Fed was not considering raising the target inflation rate. She said she expects that, as the fed shrinks its balance sheet, this will have an upward impact on interest rates.

With Ms Yellen’s term due to expire on February 3rd next, many believe this week’s hearing before Congress could be her last appearance. Asked about her future she said that “it well may be” that this is her last term.  Asked if she would stay on in the role if asked by President Trump, she replied: “I absolutely intend to serve out my term. I’m very focused on trying to achieve our congressionally mandated objectives, and I really haven’t had to give further thought at this point to this question.”

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Ms Yellen was also pressed about loans given by Deutsche Bank to Donald Trump, but said that the Fed had not been looking at transactions involving the president. "Our focus has been on the safety and soundness of the operations of Deutsche in the US," she said.

Ms Yellen also reconfirmed her commitment to begin unwinding the Fed’s colossal $4.5 trillion balance sheet this year. Like many central banks, the Fed dramatically increased the size of its balance sheet as a result of the financial crisis, embarking on a quantitative easing programme.

However policymakers are wary of prompting the kind of “taper tantrum” that greeted Ms Yellen’s predecessor’s announcement that the Fed would cease its bond-buying programme.

The Federal Reserve chief said she expected the winding-down of the balance sheet to "play out smoothly" in the markets.

Ms Yellen also warned Congress to be aware of the size of the federal debt when making budget decisions.

But Yellen’s upbeat assessment of the US economy buoyed US stock markets. The S&P 500 advanced by 0.7 per cent to 2,442 by lunchtime with the Dow Jones adding 0.6 per cent to 21,524.