Federal Reserve official
speaks on Kauai

The Federal Reserve needs to keep raising its benchmark interest rate target to a "neutral" level that keeps inflation in check while allowing sustainable economic growth, said Janet Yellen, president of the San Francisco Fed.

"I don't think we've hit neutral yet, but I don't know where it is," said Yellen in comments to reporters after a speech yesterday to the Western Independent Bankers Association Annual Conference in Kauai.

"A continuation of tightening to my mind, given what I see going on in the economy, remains appropriate."

The Fed is raising rates to head off an outbreak of inflation after the economy grew at the fastest pace since 1999 last year. The central bank may raise its benchmark overnight bank lending rate 1/4 percentage point to 2.75 percent next week, according to the median of 92 estimates in a Bloomberg News survey.

"A broad range of economic data suggests that real GDP is growing noticeably above trend," which is 3.25 percent to 3.5 percent, Yellen said in her speech. "We've seen vigorous growth in business spending and solid growth in consumer spending."

The U.S. economy expanded 4.4 percent last year. Economists forecast growth will slow to 3.8 percent this year, according to the median of 64 estimates in a Bloomberg News survey conducted March 1 to March 8.

"In its recent statements, the (Federal Open Market Committee) has indicated that the expansion seems likely to remain on track, with inflation pressures remaining well-contained," the 58-year-old bank president said. "So long as this scenario holds up, the committee has said that it expects to continue to remove the policy accommodation at a pace 'that is likely to be measured."'

"As we head toward (neutral), things become data dependent and very data driven," Yellen told reporters after her speech.

The personal consumption expenditures index excluding food and energy, the Fed's preferred inflation measure, rose 2.2 percent in the 12 months ending January. That's up from a 1.8 percent rate of increase in the year ended January 2004.

The core consumer price index rose 2.3 percent in the 12 months ended January, compared with a 1.1 percent rise in the previous 12 months.

Yellen, a non-voting member of the policy-making FOMC this year, said job growth hasn't "been quite as strong as expected, especially given all the monetary and fiscal stimulus out there."