Janet Yellen tells Congress to expect more rate hikes

Last Updated Jul 12, 2017 1:06 PM EDT

WASHINGTON — Federal Reserve Chair Janet Yellen told lawmakers on Wednesday that the central bank expects to keep gradually raising a key interest rate, as well as to start paring its massive bond holdings this year.

In a semiannual report, Yellen had a broadly positive take on the economy, noting an average of 180,000 jobs added every month so far this year and a drop in the unemployment rate to what the Fed considers its "long-term normal level." She also noted a consumer spending uptick.

"[G]rowth in household spending, which was weak earlier in the year, has picked up in recent months and continues to be supported by job gains, rising household wealth, and favorable consumer sentiment," she told members of the House Financial Services Committee. 

Business investment grew as well, and a globally improving economy bodes well for U.S. manufacturers and exporters, she said.

The markets seemed to take her comments as a dovish signal that the Fed will take is time raising interest rates. The Nasdaq rose nine-tenths of a percentage point to 6,247. The S&P 500 rose 18 points, or 0.74 percent, to 2,443. The Dow Jones Industrial Average grew 156 points to 21,565.   

In her remarks and her testimony to the House Financial Services Committee, Yellen downplayed a recent slowdown in inflation, which has been below the Fed's stated 2 percent goal for over five years. 

"For several months running we have seen some unusually low inflation readings," she said Wednesday morning, in response to a question from ranking member Maxine Waters, a Democrat from California. In May, inflation was just 1.4 percent year-over-year -- something Yellen attributed to temporary factors, such as the drop in prices for cell-phone plans. Still, Yellen said, "It's premature to reach the judgment that we are not on the path to 2 percent." 

Many economists believe that the Fed, which has raised rates three times since December, will hike rates one more time this year. But while Yellen was mostly positive, "her forward-looking comments on the economy and rates seemed a bit less emphatic than those from her press briefing last month," noted Jim O'Sullivan, chief U.S. economist at High Frequency Economics.

Yellen also indicated that the Fed would "gradually reduce" its balance sheet sometime later this year. The Fed bought up $4.5 trillion in assets immediately after the 2008 financial crisis, when it purchased Treasury and mortgage bonds by the truckload in order to keep long-term interest rates low. It must now offload assets while trying to avoid wild shift in asset prices. 

The Associated Press contributed to this report.