By Jon Hilsenrath and Kate Davidson Federal Reserve Chairwoman Janet Yellen signaled that recent turbulence in Greece, China and elsewhere overseas isn't threatening the U.S. economy enough to divert the central bank from plans to raise short-term interest rates later this year.
Many investors expect the Fed's first rate increase at its policy meeting in September. Ms. Yellen, testifying Wednesday before a House panel, avoided being pinned down on a date, but did yield new insight into her tactical thinking on the timing.
She was more inclined to move rates up soon and proceed slowly than to wait a long time and move aggressively to catch up if the Fed finds itself behind the curve in preventing the economy or markets from overheating, she told the House Financial Services Committee. Moving soon and slowly, she said, could give the central bank flexibility as it proceeds.
"If we wait longer, it certainly could mean that when we begin to raise rates we might have to do so more rapidly," Ms. Yellen said in response to a lawmaker's question. "An advantage to beginning a little bit earlier is that we might have a more gradual path of rate increases." A gradual path, she added, was a prudent approach.
The central bank has pinned its benchmark federal funds rate near zero since December 2008 to spur the economy.
While sticking with expectations for at least one rate increase in 2015, Ms. Yellen also maintained her stance in a deepening standoff with Congress.
House Republicans have been pressing her to turn over documents related to the Fed's investigation into the disclosure of confidential central bank information in 2012--a matter also being investigated by the Fed's inspector general and the Justice Department. Separately, lawmakers on both sides of the aisle are considering legislation to restructure the Fed and open it to more congressional scrutiny.
Committee Chairman Rep. Jeb Hensarling (R., Texas) issued a subpoena to the Fed in May seeking documents related to the Fed investigation after the central bank refused to release the information.
Mr. Hensarling said at the committee hearing it was "inexcusable" that the central bank hadn't turned over documents related to the matter. "The Fed is not above the law," he said.
In another testy exchange on the issue, Rep. Sean Duffy, (R., Wis.) accused Ms. Yellen and the Fed of impeding the investigation. "If anyone is trying to sweep this under the rug, it is the Fed," Mr. Duffy said. "We have a right to these documents."
Ms. Yellen said the Fed's inspector general has advised it to not comply with the subpoena because it could interfere with the criminal investigations.
Mr. Duffy shot back, "You are the chair. ... You are not bound by the IG, you are not bound by the DOJ."
The heated rhetoric marked the latest development in months of back-and-forth between the Fed and Congress over the documents. The dispute has exacerbated an increasingly strained relationship between the Fed and Congress, particularly House Republicans, many of whom view the central bank as unresponsive.
Ms. Yellen pushed back on other fronts as well, including legislative proposals to subject the Fed to more congressional scrutiny.
"Efforts to increase transparency, no matter how well intentioned, must avoid unintended consequences that could undermine the Federal Reserve's ability to make monetary policy in the long-run best interest of American families and businesses," she said in her testimony.
The Fed's interest rate planning has been thrown off by a series of events officials didn't fully anticipate this year--an economic contraction in the first quarter, a slowdown in China's economy and Greece's default on debt to the International Monetary Fund. Several officials started 2015 thinking a June rate increase was possible, but dropped the idea as these developments unfolded.
Ms. Yellen indicated she was disinclined to wait until 2016 for liftoff. The U.S. economy is growing again after its first-quarter slump. Many analysts estimate it's expanding at an annual pace between 2.5% and 3% in the second and third quarters. Meantime, the job market continues to improve, driving the U.S. unemployment rate down to 5.3% in June.
"If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal-funds rate target, thereby beginning to normalize the stance of monetary policy," Ms. Yellen said in the prepared remarks.
Ms. Yellen focused at greater length than she has before on threats to the U.S. economy from overseas. In particular, she was more explicit about the risk of unexpected events in the world's second-largest economy.
"China continues to grapple with the challenges posed by high debt, weak property markets, and volatile financial conditions," she said.
China has received a passing reference from Ms. Yellen in prepared comments before, and minutes of Fed policy meetings show China's slowing growth rate has been rising as a concern among U.S. officials behind the scenes. But she hadn't highlighted worries about debt and financial conditions there before. China's stock market has been sinking after a historic surge in the past year and its real-estate market is in a drawn-out slump.
In a separate report submitted to Congress as part of the hearings, the Fed highlighted the U.S. commercial real-estate market as source of some concern. "Valuation pressures" are rising in commercial real estate, the Fed said, and standards at banks and in commercial mortgage-backed securities markets had been loosening.
The Fed has set two conditions for raising rates-further improvement in the U.S. labor market and signs that inflation is on a path to return to 2% after running below it for more than three years. After a first-quarter slump, officials want to see evidence that growth has picked up and economic conditions can support improving labor markets.
Despite risks abroad, she concluded, "Prospects are favorable for further improvement in the U.S. labor market and the economy more broadly."
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Kate Davidson atkate.davidson@wsj.com
(END) Dow Jones Newswires
July 15, 2015 17:05 ET (21:05 GMT)
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