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Waiting too long to raise interest rates would be "unwise" as economic growth continues and inflation rises, Fed Chair Janet Yellen told Congress on Tuesday.
Repeating caution that she and other central bank officials have issued in recent months, Yellen said that even though the Fed expects to hike gradually and to keep policy accommodative, getting rates back to normal levels is important and hikes will be considered ahead.
Market reaction was prompt, with government bond yields jumping on sentiment that Yellen was teeing up next month's Fed meeting as possible for a rate hike.
"By leaving March rate hike options open, Chair Yellen is sticking with her playbook with repeated reminders that every meeting is in fact a live meeting," said Mark Hamrick, senior economic analyst at Bankrate.com.
The Fed kept its target overnight lending rate near zero for seven years and raised just twice since — in December 2015 and again a year later. The funds rate is currently targeted in the 0.5 percent to 0.75 percent range.
Traders do not expect the policymaking Federal Open Market Committee to hike at the March session. However, Yellen did say that increases would be evaluated "at upcoming meetings."
"Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession," Yellen said, according to prepared remarks of her semiannual report on monetary policy to the Senate.
When hiking at the December 2016 meeting, FOMC members indicated that three more increases are likely in 2017. Traders, though, are pricing in just two moves — in June and December. The likelihood for a March move is at just 18 percent, according to the CME.
"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 said.
Yellen deemed growth "moderate" amid a strengthening job market and inflation gradually moving up the Fed's 2 percent target. She noted that business sentiment is improving but manufacturing is getting hit with a rising U.S. dollar.
Fiscal policy also presents an uncertainty, she said, as President Donald Trump is working with congressional Republicans to roll back tax rates for individuals and corporations and to cut regulations.
Yellen urged lawmakers to focus on long-term growth and productivity and to put the burgeoning U.S. debt load on a "sustainable trajectory." The national debt currently sits at $19.2 trillion, of which the public is responsible for $14.4 trillion.
"Of course, it is too early to know what policy changes will be put in place or how their economic effects will unfold," she said. "While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity."
The remarks touched little on how the Fed plans to unwind its mammoth $4.5 trillion balance sheet, a topic of increasing concern on Wall Street. She did indicate that the Fed plans to continue reinvesting proceeds from the government debt it holds.