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U.S. Federal Reserve Chair Janet Yellen said on Thursday that a strong labor market and rising imported prices could support the inflation to go up, while the central bank would pay close attention to inflation developments.
"It's premature to conclude that the underlying inflation trend is falling well short of 2 percent," said Yellen in her testimony to the U.S. Senate Banking Committee. "I haven't reached such a conclusion," she said.
She said that Fed officials were cautious of the recent low inflation readings. The core personal consumption expenditure (PCE) price index, a gauge for the inflation level preferred by the Fed, increased 1.4 percent over the year in May, lower than the 1.5 percent in April and 1.6 percent in March.
"(We) have felt that it probably remains prudent to continue on a gradual path of rate increases," said Yellen in regard to the low inflation.
Yellen said that softness in recent inflation readings may attribute to "some special one-time transitory factors" .
According to her, the tight labor market may have upward pressures on wages and prices, as slack in the economy diminishes. In addition, the recent weakness in U.S. dollar also supported the rises of prices of imported goods, said Yellen.
"I regard the risk as being two-sided with respect to inflation. On the one hand, we are seeing low inflation numbers for several months. On the other hand, we have quite a tight labor market, and it continues to strengthen," said Yellen.
In regard to the central bank's plan to wind down its 4.5-trilllion-U.S. dollar balance sheet, Yellen reiterated that the balance sheet reduction will be conducted in a gradual and predictable way.
"We want to make sure that we manage this in a way that is not disruptive to financial markets," said Yellen.
Market analysts now widely expected that the Fed would start to shrink its balance sheet as soon as in September.