An interest rate increase "may be warranted later this year," even though the economy remains weak by historical standards, Fed Chair Janet Yellen said on Friday.
In prepared remarks for delivery at a San Francisco Fed conference, Yellen said it was not essential to see a rise in core inflation before raising interest rates. She suggested that a weakening in inflation or wages, on the other hand, would hold the central bank back from the first rate hike in 9 years.
At the same time that she was suggesting more willingness to raise rates in the near term, she also struck a dovish note about the long term, saying the return to a normal Fed funds rate was "likely to be gradual." Earlier this week Fed Vice Chair Stanley Fischer had also said there were no plans for regular rate hikes.
"The fact they're staying on point, Fischer and herself, means they think the market interpretation of them being more dovish is correct," said George Goncalves, head of rates strategy at Nomura.
The Fed chair also continued with her recent comments on currency, noting the strong dollar was hurting exports.
Stocks added slightly to otherwise muted gains on Yellen's comments. Click here to see market reaction.
Earlier this month, the Fed released its latest guidance on raising interest rates. Markets interpreted the dovish statement as a slower path to a rate hike that could happen closer to the September meeting, rather than in June.
Fed funds futures as of late Friday afternoon were pricing a better-than-average chance of the first rate hike in October at the earliest.
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—Reporting by CNBC's Steve Liesman