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Fed chair Janet Yellen sees moderate GDP growth ahead for U.S.

U.S. Federal Reserve chair Janet Yellen forecasts moderate economic growth for the U.S. economy in the coming year. Her remarks bolstered expectations that the Fed will begin to raise interest rates at its meeting later this month

Yellen's speech before the Economic Club of Washington seems to set stage for rate hike

Federal Reserve Chairman Janet Yellen told a Washington crowd the Fed can't wait too long to raise rates as that would risk disrupting financial markets and could even even push the economy into recession. (Michael Dwyer/Associated Press)

U.S. Federal Reserve chair Janet Yellen forecasts moderate economic growth for the U.S. economy in the coming year, which should improve a labour market she still sees as slack..

The nation's chief central banker also forecast a rise in U.S. inflation to the Fed target of two per cent. Inflation and jobs are the two most closely watched indicators for the Fed.

Yellen was speaking Wednesday to the Economic Club of Washington with her words closely watched by markets anticipating the first rate hike in nine years.

Her remarks bolstered expectations that the Fed will begin to raise interest rates at its meeting later this month. She even warned that the Fed can't wait too long to make a decision on rates.

"Were the [Fed] 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.

Some headwinds on U.S. economy

But she adds that policymakers need to be cautious in deciding when to start raising rates and will be conducting a thorough review of the latest economic data.

Among the headwinds for the U.S. economy are a high dollar, which is pushing down exports, and a weak global economy. But domestic spending is strong, especially consumer spending, she said.

"Over the first three quarters of this year, real GDP is currently estimated to have advanced at an annual rate of 2.24 per cent, close to its average pace over the previous five years," Yellen said, adding that that "moderate" rate of growth is expected to continue into 2016.

She pointed to low crude oil prices, which have contributed to inflation running at lower than the Fed target of two per cent and which have also cut investment in the oilpatch. Yellen said she expects the impact of low oil will lessen over the coming year.

"The economy has come a long way toward the Fed open market committee's objectives of maximum employment and price stability. When the committee begins to normalize the stance of policy, doing so will be a testament, also, to how far our economy has come in recovering from the effects of the financial crisis and the great recession," Yellen said.

"In that sense, it is a day that I expect we all are looking forward to."

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