Yellen defends Fed policies

WASHINGTON – Federal Reserve Chair Janet Yellen said Wednesday she is encouraged by signs that the economy is reviving after a brutal winter. And if the improvements stay on track, the Fed will likely start raising interest rates later this year.

Yellen, however, downplayed the importance of the timing of the first rate hike as she delivered the Fed’s midyear economic outlook to Congress. Interest rates will remain at low levels “for quite some time after the first increase,” she said.

Yellen spent three hours Wednesday addressing the House Financial Services Committee in the first of two days of testimony. While the session began with her optimistic assessment of the economy, it turned contentious at times during the question-and-answer period as lawmakers criticized everything from the Fed’s stance on interest rates to its accountability and power.

Anticipating tough questions from Republicans, Yellen outlined in her prepared remarks the steps the central bank has taken in recent years to increase transparency.

But many GOP lawmakers were less than satisfied.

They urged her to consider supporting changes in how the Fed operates, such as adopting a rule that would link rate hikes to changes in economic growth and inflation. Committee Chairman Jeb Hensarling, R-Texas, said a simple rule would make the Fed more predictable and understandable and help an economy “mired in lackluster, halting economic growth.”

Yellen strongly rejected the idea.

“There is not a central bank in the world that follows a rule that would rely on only two variables,” she said.

The Fed’s benchmark rate has been at a record low near zero since December 2008. That has translated to historically low borrowing rates for consumers and businesses.

Many economists peg September for a rate liftoff, but they see at most only two quarter-point moves this year.

Yellen stressed her outlook is based on the expectation that the labor market will keep improving and inflation will begin moving closer to the Fed’s 2 percent target for annual price gains.

A decision to raise rates, Yellen said, “will signal how much progress the economy has made in healing from the trauma of the financial crisis.”

Yellen highlighted a number of areas that had improved.

The unemployment rate in June dropped to a seven-year low of 5.3 percent.

She also noted solid gains in consumer spending, auto sales and home construction.

At the same time, Yellen described business investment and export sales as weak.

Overseas developments could also weigh on U.S. growth in coming months.

“The situation in Greece remains difficult,” she said. “And China continues to grapple with the challenges posed by high debt, weak property markets and volatile financial conditions.”