U.S. Fed chair says gradual rate hikes, balance-sheet reduction to continue

U.S. Federal Reserve Chair Janet Yellen testifies at a hearing before the U.S. House Financial Services Committee in Washington D.C., the United States, on July 12, 2017. Yellen said Wednesday that the central bank will continue to raise interest rates gradually and shrink its balance sheet this year, while monitoring inflation closely. (Xinhua/Yin Bogu)

U.S. Federal Reserve Chair Janet Yellen said Wednesday that the central bank will continue to raise interest rates gradually and shrink its balance sheet this year, while monitoring inflation closely.

"The (Federal Open Market) Committee continues to expect that the evolution of the economy will warrant gradual increases in the federal funds rate over time to achieve and maintain maximum employment and stable prices," Yellen said in in her prepared testimony before the U.S. House Financial Services Committee.

According to the central bank chief, the benchmark interest rate might not be far away from the neutral one where the economy reaches full employment, runs in line with trend growth and poses stable prices.

"Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance," said Yellen.

As part of its monetary policy normalization process, the Fed is going to reduce its 4.5-trillion-dollar balance sheet. In its policy meeting in June, the Fed announced detailed plan on how to reduce its balance sheet.

"Provided the economy evolves broadly as anticipated, it will likely begin to implement the program this year," said Yellen in her testimony referring to the balance sheet reduction.

In her testimony, Yellen expected the U.S. economy will continue to expand at a moderate pace over the next couple of years, as the steady job gains would support income growth and then consumer spending.

According to the chairwoman, improved global growth outlook would support U.S. exports and favorable financial conditions would continue to support business investment.

However, she listed inflation as one of the uncertainties the economy is facing.

"There is, for example, uncertainty about when -and how much- inflation will respond to tightening resource utilization," said Yellen.

She said that the central bank would be monitoring inflation developments closely in the months ahead.

Inflation in the U.S. has softened in recent months, which triggers discussions about the pace and timing of the future rate hikes among Fed officials.

Fed Governor Lael Brainard said on Tuesday that she would want to assess the inflation process closely before making a determination on further interest rate hikes.