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Fed should not risk falling behind the curve - Yellen

Federal Reserve Chair Janet Yellen in a testimony before the Senate on Tuesday reiterated the Fed’s December prediction of three increases in 2017, raising the Fed’s benchmark rate from its current range, 0.5 percent to 0.75 percent, to a range of 1.25 percent to 1.5 percent. However, Yellen refrained from giving a specific date for rate rise.

Yellen's description of labor markets was constructive. She said that the unemployment rate was little changed over the last year. Standing at 4.8 percent in January, the unemployment rate is at the median of FOMC participants’ estimates of its longer-run normal level. She noted that wage growth has picked up and reflects further job market tightening.

Comments on inflation were brief. Yellen said inflation has “moved up over the past year, mainly because of the diminishing effects of the earlier declines in energy prices and import prices.” On inflation expectations, she noted that market-based measures of inflation compensation have moved up from “very low levels” but remain “low” nonetheless.

Inflation showed signs of rising to a healthier level. Prices increased by 1.6 percent during 2016, a percentage point more than in the previous year, although that is still below the Fed’s preferred 2 percent annual pace.

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. Yellen will complete her semi-annual testimony today, presenting to a House panel, although, there is likely to be few surprises given she only spoke yesterday.

"Altogether, we view her comments as indicating that the median of three rate increases in 2017 that the Fed set out in its December forecasts remains in place. We retain our outlook for two rate increases in 2017, two more in 2018, and balance sheet reduction in early 2019." said Barclays Research in a report.

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