While recent soft inflation readings justify a gradual pace for interest-rate hikes, there is also a danger of moving too slowly, Federal Reserve Chairwoman Janet Yellen said Tuesday.
“We should also be wary of moving too gradually,” Yellen said in a speech to the National Association for Business Economics meeting in Cleveland.
There is a risk that the labor market could become overheated, causing an inflation problem down the road, she said. And persistently easy policy could also have adverse implications for financial stability, the Fed chairwoman said.
Her remarks show that she is likely in the majority at the central bank that wants to continue to raise rates one more time this year. Only a small minority of Fed officials want the Fed to hold policy steady until 2018 and markets have priced in slightly better than 50/50 odds for a move in December.
In lengthy remarks, Yellen said she still thinks this year’s low inflation is “probably temporary” and that inflation will likely rise to reach the central bank’s 2% target “over the next few years.”
But she admitted the central bank is struggling to understand the soft inflation readings and said the central bank could be misreading the inflation dynamics.
Both headline and core inflation moved higher last year but have slipped again in recent months. Some Fed officials want to see a pickup in inflation before the central bank hikes interest rates again.