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Yellen Hints at Possible US Interest Rate Hike

Federal Reserve Chair Janet Yellen arrives for testimony before the Senate Banking Committee, on Capitol Hill in Washington, Feb. 14, 2017.

The head of the U.S. central bank says the economy is improving enough to consider raising interest rates during the next few months.

U.S. Federal Reserve Chair Janet Yellen told a congressional committee Tuesday, that she expects the economy to continue its modest expansion. Yellen warned that waiting too long to raise rates could allow inflation to spike and force the Fed to raise rates abruptly in the future, damaging economic growth.

During the recession, the Fed slashed rates nearly to zero in a bid to boost economic growth. But economists say leaving rates too low for too long can cause the economy to overheat. In the past 14 months, the Fed has raised rates twice to the current 3/4 of a percent. That is still lower than historic averages and Yellen says it is still "accomodative", meaning low enough to encourage growth.

The Fed is supposed to manage the economy in ways that encourage full employment and stable prices. Officials try to keep inflation at a modest two percent per year, high enough to avoid damaging deflation and low enough and steady enough that businesses and families can make reliable plans about investments, home buying, and retirement.

Yellen says inflation is running about 1.6 percent a year, and has gotten closer to the two percent target. She expects inflation will continue to rise slightly.

The Fed chair says there is "considerable uncertainty" about the economic outlook because of possible changes in government spending, taxes, productivity growth, and developments abroad.

President Donald Trump says he will spend more on infrastructure, cut taxes, slash regulation, and make major changes in trade policies. But many details of those proposals have not yet been spelled out, and it is unclear what form those policies will take when and if they are approved by Congress.