And she warned that the fiscal agenda that emerges under the incoming administration, which appears likely to include tax cuts and increased infrastructure spending, could change the Fed's calculus on how fast to continue raising rates.
“We will be watching the decisions that Congress makes and updating our economic outlook” as they begin to play out, Yellen said, under questioning. “Things could turn out very differently, we understand.”
Financial markets appeared largely unfazed by her comments, with stocks barely fluctuating. Bond yields continued to climb on new inflation data that showed consumer prices increased last month at their fastest pace since April.
Analysts have said that Trump's tax and spending plans, if enacted, could accelerate inflation, because unemployment has fallen below 5 percent and wages are growing at an increased rate. Yellen seemed to nod to those concerns, noting that the economy no longer needs the dose of fiscal stimulus that Fed officials called for in the wake of the Great Recession and urging lawmakers to keep America's long-run budget deficit concerns in mind.
Asked if uncertainty over Trump's agenda warranted holding off on a December rate increase - which economists have long suggested, and which Fed officials have been foreshadowing for months - Yellen gave what amounts, in the guarded language of Fed chairs, to a fairly direct "no".
“My guess is that uncertainty about these measures will last for some considerable time, and we have had an accommodative monetary policy…for a long time,” she said, adding: “I would think that the judgment that the committee reached in November remains the appropriate one."
Most analysts read the Fed's November release as a sign that a rate increase was just around the corner. In her testimony, Yellen seemed to encourage that reading, telling the committee that Fed officials deemed this month “that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon.”
She said growth and inflation appear to be gaining steam in the second half of the year, and she warned against waiting too long to begin raising rates again.
“Were the FOMC to delay increases in the federal funds rate for too long,” Yellen said, “it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee’s longer-run policy goals. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.”
What happens after the next rate hike could well hinge on Congress and Trump. The Fed has long suggested it would embark on a carefully planned series of moves to bring rates up from their historically low levels over the next few years. After a single and small increase last year, rates have remained just above zero throughout 2016. They have held off as they watched for even more evidence that the labor market is getting close to full employment and the inflation rate, which currently is running below the Fed's 2 percent target, is rising.
In her remarks, Yellen said the Fed, “continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time” in order to reach full employment and not overshoot on inflation. She also said that “While above-trend growth of the labor force and employment cannot continue indefinitely, there nonetheless appears to be scope for some further improvement in the labor market.”
Analysts cautioned that Yellen may need to change her tune in short order, if Trump and Congress agree on a package of measures to stimulate the economy. "At some point, particularly if a stronger pace of growth materializes in the back half of 2017 as we anticipate," researchers from Deutsche Bank said on Wednesday, "the Fed may have to rethink this 'gradual' strategy."
Taking questions from the House and Senate members on the committee, Yellen addressed two other possible consequences of the election.
She said she hoped the new administration would not roll back financial regulations put in place under the Dodd-Frank bill passed after the Great Recession. “I certainly would not want to see all the improvements we have put in place, I would not want to see the clock turn back on those," she said, "because I think they’re important to reduce the odds of a future crisis.”
Yellen also made a case for continued Fed independence, an issue that has bubbled up given Trump's criticism of the central bank and Yellen personally, and efforts in Congress to impose more oversight. “We’ve really seen terrible economic outcomes in countries where central banks have been subject to political pressure,” she said.