Federal Reserve Chair Janet Yellen said Friday another interest rate increase could be "appropriate" later this month -- if US employment and inflation remain in line with expectations.
Yellen also defended the Fed's performance, saying it has not been too slow to raise the benchmark lending rate, given the tepid recovery and sluggish inflation.
The US central bank last raised the federal funds rate in December -- only the second increase in a decade -- but is widely expected to hike it again at the March 14-15 policy meeting given the recent upward move in inflation.
The Fed's policy-setting rate committee "will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," Yellen said.
The Fed will get to see one more employment report before they gather to decide the direction of interest rates, when the Labor Department releases data for February on March 10, and will see two inflation reports the following week.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, summed up Yellen's speech in one line: "They?ll hike this month unless payrolls are disastrous."
Yellen's comment that a March increase could be appropriate "is about as blunt a statement of near-term policy intent as we have ever seen from (the) Fed chair," he said.
And "it means that the Fed will hike unless next week's payroll report is calamitous. That's unlikely, so we expect rates to rise."
- Raise rates gradually -
However, in her speech to a Chicago business group, Yellen said central bankers continue to believe they will only need to raise rates "gradually" assuming the economic data "continue to come in about as we expect."
"Those increases would keep the economy from significantly overheating, thereby sustaining the expansion and maintaining price stability," she said.
In the face of some critics, even among Fed officials, who say that the central bank risks allowing inflation to rekindle by raising rates so slowly, Yellen defended the committee's performance.
Waiting too long to raise rates could mean the Fed has to hike more rapidly at some point, which "could risk disrupting financial markets and pushing the economy into recession," she said.
However, Yellen said, "I currently see no evidence that the Federal Reserve has fallen behind the curve," adding she had confidence that a gradual approach was still "likely to be appropriate."
Many economists have pointed to the Fed's preferred measure of inflation, which recently reached a targeted two percent annual rate, but Yellen and other Fed officials have noted that higher energy prices are contributing to that increase.
Fed officials in December projected three rate hikes this year, but Yellen said the adjustments in the wake of the 2008 financial crisis have been "at a slower pace than most FOMC participants anticipated in 2014. "
She noted that "the ongoing expansion has been the slowest since World War II, with real GDP growth averaging only about two percent per year" because of "slower growth in the labor force in recent years... and disappointing productivity growth both in the United States and abroad."