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Yellen: Labor market tightening, low inflation not expected to last

Federal Reserve Chair Janet Yellen still sees the current levels of lower-than-expected inflation as temporary and that further rate increases are likely to be appropriate, she said in an Oct. 15 speech in Washington, D.C.

The price change in core personal consumption expenditures dropped to 1.3% in August from 1.9% earlier this year. The Fed has a long-term inflation objective of 2%. "My best guess is that these soft readings will not persist," Yellen said.

"The recent softness seems to have been exaggerated by what look like one-off reductions in some categories of prices, especially a large decline in quality-adjusted prices for wireless telephone services."

Yellen added that policy tightening by the U.S. central bank appears necessary in the short term for the federal funds rate to reach the "neutral" level, a conceptual rate level that would keep the U.S. economy stable.

"The neutral rate currently appears to be quite low by historical standards, implying that the federal funds rate would not have to rise much further to get to a neutral policy stance, but we expect the neutral level of the federal funds rate to rise somewhat over time, and, as a result, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion," she added.

She also described wage growth as "moderate" and said gains in wages, while mixed, indicate that the labor market is tightening when taking into account slow productivity growth.

Federal Reserve Bank of Minneapolis President Neel Kashkari has cited weak wage growth and slack in the labor market in his decisions to vote against both rate increases this year, and he believes the low inflation levels warrant a pause in policy tightening.

Yellen acknowledged that inflation projections are "imperfect" in several ways and that there may be more slack in the labor markets than what her view of the data indicates.