Yellen says Fed to keep raising rates despite concern about weak inflation

CLEVELAND — Janet Yellen, the Federal Reserve chairwoman, said on Tuesday that the Fed planned to continue raising its benchmark interest rate despite some uncertainty about the reasons that inflation had weakened in recent months.

Yellen said the Fed still expected inflation to increase toward its 2 percent annual goal, primarily because the supply of available workers continued to dwindle, putting pressure on employers to compete by raising wages. She raised the possibility that the Fed would increase rates more slowly if weak inflation persists, but indicated the Fed wasn’t yet ready to recalibrate.

“Given that monetary policy affects economic activity and inflation with a substantial lag, it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent,” Yellen told the National Association for Business Economics.

The Fed has raised its benchmark rate twice this year, in March and June, to a range between 1 and 1.25 percent. The Fed held rates at an unusually low level for years after the 2008 financial crisis to encourage borrowing and risk-taking; it is gradually raising rates to reduce that encouragement as the economy recovers.

The unemployment rate was 4.4 percent in August, and Fed officials expect it to keep falling toward 4 percent, the lowest level since 2000. Wages are rising, too.

But inflation has remained consistently low. The Fed has failed to achieve its 2 percent annual target for the past five years, and it is on pace to miss the target again this year.

Low inflation is a concern because it keeps nominal interest rates at a relatively low level, Yellen said, limiting the Fed’s ability to respond to economic downturns.

She said labor market slack was no longer weighing on inflation to any significant degree. Instead, low inflation in the past few years is primarily the result of price pressures, like a recent price war among providers of cellphone plans.

This year, inflation has fallen even further, for reasons that she said economists do not understand. But Yellen cautioned that low inflation this year was not a reason to assume that inflation would remain low in coming years.

Most analysts expect the Fed to raise its benchmark rate at its final meeting of the year, in December.

Dake Kang / Associated Press Federal Reserve Chair Janet Yellen speaks to Arthur Anton, CEO of Swagelok, a manufacturing company, during a job training tour Tuesday in Cleveland. She said the Fed is puzzled by unusually low inflation.