U.S. Fed chair underlines gradual monetary tightening amid low inflation

U.S. Federal Reserve Chair Janet Yellen said on Tuesday that it's appropriate for the central bank to continue gradually tighten its monetary policy in view of the uncertainties around inflation.

"A gradual approach is particularly appropriate in light of subdued inflation and a low neutral real interest rate, which imply that the FOMC (Federal Open Market Committee) will have only limited scope to cut the federal funds rate should the economy be hit with an adverse shock," Yellen said at the annual meeting of the National Association for Business Economics.

She made the remarks when she referred to the policy implications amid the uncertainties around inflation and neutral interest rate.

She argued that faster monetary tightening could jeopardize economic expansion, while moving too slow could risk overheating the economy, as the job market continues strengthening.

"It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent," said Yellen.

In July, the core personal consumption expenditure (PCE) index, Fed's favor inflation indicator, rose only 1.4 percent year on year, below Fed's 2 percent target and also lower than the 1.9 percent in January. The index has been running below the 2 percent target for years.

Yellen reiterated that the inflation will move up to the central bank's 2 percent target over the next few years, as the Fed continues to gradually tighten its monetary policy and the job market continues to strengthen.

But she noted that the outlook is uncertain due to the "inherent imprecision" in estimates of labor utilization, inflation expectations and other factors.

"As a result, we will need to carefully monitor the incoming data and, as warranted, adjust or assessments of the outlook and the appropriate stance of monetary policy," said Yellen.