Yellen: Expect a Rate Hike This Year

Federal Reserve Chair Janet Yellen attends a news conference after chairing the second day of a two-day meeting of the Federal Open Market Committee to set interest rates in Washington June 17, 2015. Carlos Barria/Reuters

CLEVELAND (Reuters) - Federal Reserve chair Janet Yellen on Friday said she expects the Fed to raise interest rates at some point this year, but pointed strongly to her concerns that U.S. labor markets remain weak and that more workers could be encouraged back into the job market with stronger growth.

In a speech that cautioned about the status of workers as well as some of the international risks that have developed, Yellen gave no direct hint about whether she anticipates more than one rate hike over the Fed's four remaining meetings in 2015.

She said she expects the economy should grow steadily for the remainder of the year, and that would at least allow the Fed to move ahead with its first rate hike in nearly a decade.

"I expect it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy," Yellen said in a speech to the City Club of Cleveland, a civic group that sponsors high-level speakers.

"But I want to emphasize that the course of the economy and inflation remains highly uncertain...We will be watching carefully to see if there is continued improvement in labor market conditions, and we will need to be reasonably confident that inflation will move back to 2 percent in the next few years."

Despite the improvement of recent years, she said labor markets remain out of line, with high levels of part-time work and weak participation rates.

The low unemployment rate "does not fully capture the extent of slack," she said. "I think a significant number of individuals still are not seeking work because they perceive a lack of good job opportunities and that a stronger economy would draw some of them back into the labor force."

Yellen's remarks come less than a week before she is to appear before Congress for a biannual briefing before lawmakers, and as the central bank approaches a likely rate hike decision.

It is a step that will have global implications, putting the Fed on a path separate from central banks in Europe and Japan that continue fighting economic crises, and potentially drawing capital out of developing economies.

According to the individual economic projections released by Fed officials at their June meeting, there was a roughly even divide between those who expect only one interest rate increase this year - and might thus be prepared to wait late in the year to hike - and those who expect two and would want to move sooner. Yellen's position is uncertain, and her influence as chair is likely pivotal in the ultimate decision.

Fed officials seem to have set the stage for an initial increase as early as September. But recent events - the stock market collapse in China and the confusion in Greece in particular - have raised fresh concerns over how the world economy may hurt U.S. growth. Investors now believe an initial hike is not likely until next year.

The Fed has kept rates near zero for almost seven years to support an economy that had suffered through the worst downturn since the Great Depression. Steady growth and job creation has now put the economy at what many Fed officials believe is near full employment.

Though it will likely take years for the central bank to gradually return rates to more normal levels, the initial step - "liftoff" - has attracted outsized attention as a symbol that the Fed is ready to declare the crisis over.

Yellen said she felt that initial step will have a small impact, and that the Fed would be raising rates only gradually from that point on.

Yellen said she agreed that the slow start of the year was likely the result of temporary factors, such as low oil prices undercutting investment in the U.S. energy sector, and a rising dollar pushing up the international price of and demand for U.S. goods and services. But she also said the economy faced constraints that could hold it back, from a still underperforming housing market to the unresolved crisis in Greece.