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VOL. 39 | NO. 13 | Friday, March 27, 2015

Yellen: A rate increase may be warranted later this year

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WASHINGTON (AP) — Federal Reserve Chair Janet Yellen said Friday that continued improvement in the U.S. economy means an increase in the Fed's key interest rate could come later this year.

But Yellen stressed that any rate increases would likely be very gradual.

The Fed has kept its benchmark rate at a record low near zero for more than six years. Yellen said in a speech in San Francisco that the time to start raising the rate could occur "sometime this year," though she said that time hasn't yet arrived.

She said that when the Fed does start raising rates, policymakers expect the increases to be "rather gradual" for the next few years. Yellen said Japan's experience over the past 20 years argues for a cautious approach. Over that time, Japan has struggled with anemic economic growth as well as deflation — a period of falling prices that's been hard for its policymakers to overcome.

Yellen said a key reason for a gradual approach to higher rates is that the danger of raising them too fast is greater than the risk of doing so too slowly. If the Fed were to tighten loan rates too quickly, the economy could stall and, with rates still relatively low, the Fed would have little room to cut them.

But she did say that taking a "gradualist approach" to raising rates carries its own risks. One is the possibility that it might undermine the Fed's credibility as an inflation fighter and could risk instability in financial markets by allowing an excessive buildup in borrowing.

"At this point, the evidence indicates that such vulnerabilities do not pose a significant threat, but the (Fed) is carefully monitoring developments in this area," she said.

Yellen's comments offered elaboration on signals the Fed sent after its March policy meeting last week. It said then that it was content to move slowly to raise rates because it wanted to see further improvement in the job market and an increase in inflation levels.

Inflation recently has fallen further below the Fed's 2 percent target for annual price increases.

On Monday, Fed Vice Chairman Stanley Fischer said in a speech in New York that he expected the central bank to start raising rates sometime this year.

Both Yellen and Fischer stressed the Fed's expectation that rate hikes would be gradual and that the Fed's action would depend on how the economy performs in coming months.

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