NEW YORK (TheStreet) -- Federal Reserve Chair Janet Yellen indicated during a speech to the City Club of Cleveland on Friday that she still expects the Federal Open Market Committee to raise interest rates this year. However, she emphasized that the pace of increases would be gradual and dependent upon continued improvement in the economy.
"Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy," she said. "But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step. We will be watching carefully to see if there is continued improvement in labor market conditions, and we will need to be reasonably confident that inflation will move back to 2% in the next few years."
Yellen noted there are a couple of key factors that could restrain growth. Businesses are holding large amounts of cash on their balance sheets, suggesting risk aversion, and the housing sector seems likely to improve only gradually.
"While national home prices have been rising for a few years and home sales have improved recently, residential construction has remained quite soft," she said. "Many households still find it difficult to obtain mortgage credit, but, more generally, the weak job market and slow wage gains in recent years appear to have induced people to double-up on housing. For example, many young adults continue to live with their parents."
The Fed chair also called for policies to boost productivity growth, which recently has been disappointing, and is necessary to support rising household incomes.
"As a general principle, the American people would be well served by the active pursuit of effective policies to support longer-run growth in productivity," said Yellen. "Policies to strengthen education and training, to encourage entrepreneurship and innovation, and to promote capital investment, both public and private, could all potentially be of great benefit in improving future living standards in our nation."