Yellen says economy likely ready for rate hike later in 2016

WASHINGTON -- Federal Reserve Chair Janet Yellen said Wednesday the central bank has no "fixed timetable" for raising interest rates but she believes the economy is ready for a rate hike by the end of the year.

She said during an appearance before the House Financial Services Committee that when the Fed met last week, a majority of her colleagues believed it would be appropriate to raise rates before the end of this year.

The Fed boosted its key policy rate in December 2015 to a range of 0.25 percent to 0.5 percent. But since then, officials have left the rate unchanged. Yellen told the lawmakers she believed it would make sense to boost the rate again "if things continue on the current path and no significant new risks arise."

The Fed last week voted 7-3 to keep its key interest rate where it has been all year. But it did send a strong signal it is prepared to raise rates before the end of the year, with many expecting a move in December.

Yellen said while inflation is not a threat at the moment, it is possible the economy could begin to overheat with prices rising too quickly, forcing the Fed to accelerate the pace of rate hikes and raising the threat of a recession.

"If we allow the economy to overheat, we could be faced with having to raise interest rates more rapidly than we would want, which could conceivably jeopardize that good state of affairs that we have come close to achieving," Yellen told lawmakers.

Some Republicans on the panel echoed a charge Republican presidential nominee Donald Trump made during Monday's debate the Fed had become too political and was delaying rate hikes in an effort to help Democrats win the election.

"We are in a big, fat ugly bubble," Trump said during the debate. "We have a Fed that's doing political things. This Janet Yellen of the Fed."

Rep. Scott Garrett, R-N.J., pressed Yellen to say whether she believed Fed board member Lael Brainard should recuse herself from voting on interest-rate decisions given she has donated to Hillary Clinton's campaign.

Yellen said federal law allows Fed governors to make political donations. Garrett also said he viewed Yellen's meetings with Treasury Secretary Jacob Lew and other Treasury Department officials as evidence she was too close to the Obama administration.

All Fed leaders, whether Democrats or Republicans, have followed the practice of holding weekly sessions with the Treasury secretary to review U.S. and global economic developments.

"I certainly have never been pressured in any way by the administration," Yellen told the committee. "The (Obama) administration, my experience has been, greatly respects the Fed's independence to make decisions in accordance with the Fed's mandate."

Yellen, who was testifying Wednesday on the Fed's role in regulating the nation's banking system, received a number of questions from lawmakers about the situation at Wells Fargo and whether federal banking regulators fell down on the job by not detecting practices at the nation's second largest bank that allegedly had Wells Fargo employees opening millions of accounts without customers' permission.

Yellen said it was important for top management at all banks to make sure the compensation policies they establish do not create incentives for executives to pursue improper policies that harm customers or put the banks' safety at risk.

In her testimony, Yellen said the health of the financial system has strengthened considerably since the 2008 economic crisis, in part because of tougher regulations passed by Congress in 2010.

She said the Fed wants to make sure the new requirements keep the country's largest banks from failing and destabilizing the entire financial system, while avoiding undue burdens on smaller institutions.

As part of that effort, the Fed has put forward a proposal to ease requirements for annual stress tests for all but the largest institutions.

Under the change the Fed is mulling, all banks with more than $50 billion in assets still would have to undergo annual stress tests to see if they would have a sufficient capital buffer to withstand loan losses in a severe economic downturn. But a concurrent, more detailed review would be dropped for all banks but those with more than $250 billion in assets.

While members of the committee praised this step, many Republican lawmakers complained the Fed was still not doing enough to alleviate unnecessary regulatory burdens.