Federal Reserve Chair Janet Yellen said Wednesday she is encouraged by signs that the economy is reviving after a brutal winter. And if the improvements stay on track, the Fed will likely start raising interest rates later this year.
Yellen, however, downplayed the importance of the timing of the first rate hike as she delivered the Fed's mid-year economic outlook to Congress. Interest rates will remain at very low levels "for quite some time after the first increase," she said.
Yellen spent three hours Wednesday addressing the House Financial Services Committee in the first of two days of testimony. While the session began with her optimistic assessment of the economy, it turned contentious at times during the question-and-answer period as lawmakers criticized everything from the Fed's stance on interest rates to its accountability and power.
Anticipating tough questions from Republicans, Yellen outlined in her prepared remarks the steps the central bank has taken in recent years increase transparency. She said the Fed holds press conferences after four of its eight meetings each year and updates its economic forecasts more frequently.
"The Federal Reserve ranks among the most transparent central banks," Yellen said.
But many GOP lawmakers were less than satisfied.
They urged her to consider supporting changes in how the Fed operates, such as adopting a rule that would link rate hikes to changes in economic growth and inflation. Committee Chairman Jeb Hensarling, R-Texas, said a simple rule would make the Fed more predictable and understandable and help an economy "mired in lackluster, halting economic growth."
Yellen strongly rejected the idea.
"There is not a central bank in the world that follows a rule that would rely on only two variables," she said.
The Fed's benchmark rate has been at a record low near zero since December 2008. That has translated to historically low borrowing rates for consumers and businesses.
Many economists peg September for a rate liftoff, but they see at most only two quarter-point moves this year.
"If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds target," Yellen said.
Yellen stressed that her outlook is based on the expectation that the labor market will keep improving and inflation will begin moving closer to the Fed's 2 percent target for annual price gains. Inflation is currently running lower than the pace the Fed believes is optimal for a healthy economy.
A decision to raise rates, Yellen said, "will signal how much progress the economy has made in healing from the trauma of the financial crisis."
Yellen highlighted a number of areas that had improved.
The unemployment rate in June dropped to a seven-year low of 5.3 percent. She also cited "noticeable declines" over the past year in the number of long-term unemployed — people who have been out of work six months or longer — and in the number of people working part-time because they can't find full-time jobs. But she said problems with the labor market remained, including anemic wage growth.
She also noted solid gains in consumer spending, auto sales and home construction.
At the same time, Yellen described business investment and export sales as weak. Investment has been hurt by spending cutbacks at energy, while exports have suffered from the rising value of the dollar, which makes U.S. goods less competitive in foreign markets.
Overseas developments could also weigh on U.S. growth in coming months.
"The situation in Greece remains difficult," she said. "And China continues to grapple with the challenges posed by high debt, weak property markets and volatile financial conditions."
If either Greece or China created "substantial risks," it could delay a Fed rate increase, she said. Any delay might mean that subsequent rate hikes might take place more rapidly than the gradual pace the Fed currently anticipates.
Yellen's appearance Wednesday will be followed by testimony Thursday before the Senate Banking Committee. Under law, she is required to provide Congress twice a year with updates on the Fed's economic outlook and its handling of interest rates.
The Fed, responding to the 2008 financial crisis and the worst economic downturn in seven decades, expanded its balance sheet by purchasing trillions of dollars in bonds and took other aggressive actions to lower interest rates and battle high unemployment.
The moves triggered criticism that the Fed has become too powerful, and is too secretive and unaccountable. Lawmakers in both the House and Senate have introduced legislation to rein in the Fed's independence. Such measures, the Fed says, could damage the independence it needs to maintain credibility with financial markets.
Yellen faced a particularly sharp rebuke from a Republican lawmaker unhappy over the Fed's refusal to hand over documents subpoenaed by the committee. The requested documents relate to an investigation of a possible Fed leak of market-sensitive information in October 2012.
"If anyone is trying to sweep this under the rug, it is the Fed," said Rep. Sean Duffy, R-Wisconsin.
Yellen said that she planned to turn over all the documents that have been requested once the investigations by the Department of Justice and the Fed's inspector general are completed. She said she had been told that turning over all the information now could jeopardize those pending investigations.