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The Fed Chairwoman Janet Yellen testified before the Joint Economic Committee of U.S. Congress on Thursday. She said that the U.S. labour market is close to full employment.
"I currently judge that U.S. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labour market," she said.
Yellen expects inflation to pick up toward the Fed's 2% inflation target as "the disinflationary effects of declines in energy and import prices wane".
The Fed chairwoman noted that if the Fed delays its interest rate for a longer period, it could lead to a recession.
"Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession," Yellen said.
"Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability;" she added.
Yellen also said that the interest rate hike will depend on the incoming economic data.
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