The Federal Reserve will likely need to raise interest rates at an upcoming meeting, Fed Chair Janet Yellen said on Tuesday, although she flagged considerable uncertainty over economic policy under the Trump administration.
Yellen said delaying rate increases could leave the Fed's policymaking committee behind the curve and eventually lead it to hike rates quickly, which she said could cause a recession.
"Waiting too long to remove accommodation would be unwise," Yellen said in prepared remarks before the U.S. Senate Banking Committee, citing the central bank's expectations the job market will tighten further and that inflation would rise to 2 percent.
"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."
Yellen did not say if Fed policymakers expected the economy would warrant three interest rate increases this year, as they last signaled in December. Nor did she give indications whether the first rate hike of the year might come at its next meeting in March or at the subsequent June meeting, which is when most analysts expect a rate increase.
Yellen was appearing in Congress for the first time since Republicans took control of the White House and both houses of the legislature and she nodded to the uncertainties over the direction of U.S. economic policy.
"Changes in fiscal policy or other economic policies could potentially affect the economic outlook," she said. "It is too early to know what policy changes will be put in place or how their economic effects will unfold."
President Donald Trump has announced a rollback of financial regulation with few details and there is no clarity on the size and scope of the tax cuts he has promised, while possible new taxes on imports and increased infrastructure spending could boost inflation.
Inflation has remained persistently below the Fed's 2 percent target for several years and Yellen said it was "reassuring" that market-based measures of inflation compensation had recently risen, though she noted they remain low.
Yellen said she did not want to weigh in on specific tax and spending proposals, but she urged policymakers to consider the importance of making U.S. businesses more efficient, which economists believe is essential to raising living standards over the long term.
"I would also hope that fiscal policy changes will be consistent with putting U.S. fiscal accounts on a sustainable trajectory," she said.