WASHINGTON — Federal Reserve Chair Janet Yellen said Tuesday that the U.S. economy is making steady progress, but for now the Fed is sticking with patience in raising interest rates because the labor market is still healing and inflation is too low.

In her semiannual economic report to Congress, Yellen sought to explain how the Fed would begin raising rates from lows near zero and what it would say to prepare financial markets. Its continuing use of the word “patient” means a rate hike is unlikely for at least the next two meetings, she said.

When the Fed eventually changes its language, Yellen said that will not necessarily translate to an imminent shift in monetary policy. Rather, it will indicate that the Fed can start considering rate hikes on a “meeting-by-meeting basis.”

Her remarks come at a delicate time for the Fed. After winning praise for how she handled her first year as head of the central bank, Yellen is facing a tougher challenge this year. She must navigate a transition from record-low interest rates to a period when the Fed will start raising rates while trying to keep financial markets calm and maintain economic growth.

To some private economists, Yellen appeared to be positioning the Fed for a rate hike in June.

Yellen’s upbeat assessment of growth and the labor market, as well as her comments on inflation, are “a clear sign that March is very much in play for dropping `patient’ and, hence that June is still in play for the first hike,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

As expected, Yellen stuck closely to the views revealed by the minutes of the Fed’s Jan. 27-28 meeting, in which Fed officials recognized that the economy was finally gaining momentum nearly six years after the country began to emerge from the worst recession since the 1930s.

But Republicans, who now control Congress, have complained that the Fed's cautious approach is fueling the risks that inflation could accelerate to worrisome levels in the future, forcing it to push rates up more quickly.                


Senate Banking Committee Chairman Richard Shelby, R-Alabama, said in his opening remarks that a prolonged delay in raising rates “could lead to a more painful correction down the road.”

Shelby was also critical of secrecy at the Fed. He said that the minutes of the Fed’s discussions, released three weeks after each meeting, offer too little guidance about how it plans to unwind its unprecedented level of support to the economy.

“What the (Fed) is thinking and how they are analyzing this very difficult problem set remains a mystery,” Shelby told Yellen. “I would argue … that there is an even greater need now for additional oversight by Congress and further reforms” of the Fed.

Conservative Republicans in both the House and Senate have been pushing for legislation that would expand the ability of Congress to oversee Fed actions, including expanded audits of the institution. Yellen and other Fed officials have opposed this effort, saying it could compromise the Fed’s independence.

Yellen reiterated her strong opposition to the legislation, which would grant the Government Accountability Office the power to audit the central bank’s decisions on monetary policy.

The bill would “politicize monetary policy and bring … political pressures to bear on the Fed,” Yellen said.

Yellen said that in the 1980s, the Fed under then-Chairman Paul Volcker would probably not have been willing to take the hard decisions to drive interest rates up to successfully deal with high inflation if it had been subjected to GAO reviews of its decisions.

In her testimony, Yellen said that since she delivered the Fed’s last report to Congress in July, the labor market has improved “along many dimensions.” She noted that the unemployment rate is down to 5.7 percent from a high of 10 percent in late 2009, and job growth has accelerated to an average of 280,000 new jobs created each month.

Long-term unemployment has declined substantially and fewer workers are reporting that they can only find part-time work, she said. But balanced against those improvements, Yellen said that “too many Americans remain unemployed or underemployed, wage growth is still sluggish and inflation remains well below our longer-run objective.”

One of the Fed’s primary goals is stable prices, which it defines as inflation rising at 2 percent annually. But for more than two years, inflation has been rising well below 2 percent and has fallen farther from that target in recent months.

Yellen attributed that development to the big plunge in oil prices and a rising value of the U.S. dollar, which has strengthened as the U.S. economy has outperformed other countries. A stronger dollar holds down inflation by making imports cheaper for Americans.

Yellen noted that foreign economic developments posed risks to the U.S. outlook, although she said the pace of growth overseas had improved slightly in the last half of last year.

She said the foreign challenges included the threat that the Chinese economy, the world’s second largest, could slow more than anticipated. She also mentioned on-going threats in Europe including a slow recovery and very low inflation. But aggressive efforts by the European Central Bank to boost growth should boost growth in the euro area.

Yellen will follow her appearance Tuesday before the Senate Banking Committee with testimony Wednesday before the House Financial Services Committee.