Federal Reserve Chair Janet Yellen says Tuesday that the Fed is puzzled by the persistence of unusually low inflation, and that it might have to adjust the timing of its interest-rate policies accordingly.

Speaking to a conference of economists, Yellen touched upon key questions the Fed is confronting as it tries to determine why inflation has remained chronically below its inflation target of 2% annually. The Fed chair says officials still expect the forces keeping inflation low to fade eventually. But she conceded that the Fed may need to adjust its assumptions.

Most analysts expect the central bank to raise rates in December, for a third time this year, in a reflection of the economy’s improvement. But the Fed has said its rate hikes will depend on incoming data.

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Yellen was warning markets not to underestimate the likelihood of another Fed hike before year-end, notes Royce Mendes of CIBC World Markets Inc. “Indeed, the speech certainly had a hawkish tone to it. Despite sluggish inflation, [she] made clear that the committee will not be waiting to see the whites of inflation’s eyes before tightening policy further, calling it ‘imprudent to stay on hold until inflation’ reaches target.”

He adds, “Taking it a step further, she cautioned that without modest hikes the economy could be in a position to overheat, while also exacerbating financial stability risks.”

In her speech, Yellen went further than she has before in suggesting that the Fed could be mistaken in the assumptions it is making about inflation.”My colleagues and I may have misjudged the strength of the labour market, the degree to which longer-run inflation expectations are consistent with our inflation objective or even the fundamental forces driving inflation.”

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The Fed seeks to control interest rates to promote maximum employment and stable prices, which it defines as annual price increases of 2%. While the Fed has met its goal on employment, with the jobless rate at 4.4%, near a 16-year low, it has continued to miss its inflation target.

Chronically low inflation can depress economic growth because consumers typically delay purchases when they think prices will stay the same or even decline.

Inflation, which was nearing the 2% goal at the start of the year, has since then fallen further behind and is now rising at an annual rate of just 1.4%.

Yellen has previously attributed the miss on inflation this year to temporary factors, including a price war among mobile phone companies. She and other Fed officials have predicted that inflation would soon begin rising toward the Fed’s 2% inflation target, helped by tight labour markets that will drive up wage gains.

Fed recently left benchmark unchanged

Yellen’s remarks on Tuesday came a week after Fed officials left their benchmark rate unchanged, but announced that they would start gradually shrinking their huge portfolio of Treasury and mortgage bonds. Those holdings had grown from purchases the Fed made over the past nine years to try to lower long-term borrowing rates and help the U.S. economy recover from the worst downturn since the 1930s.

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The Fed did retain a forecast showing that officials expect to boost rates three times this year. So far, they have increased their benchmark lending rate twice, in March and June, leaving it at a still-low range of 1% to 1.25%.

Last week, the Fed says the reductions in its bond holdings would begin in October by initially allowing a modest $10 billion in maturing bonds to roll off the $4.5 trillion balance sheet each month.

The size of the monthly reductions will be increased by $10 billion each quarter until they reach $50 billion a month a year from now. The balance sheet is expected to remain just under $3 trillion two years from now, still far higher than the $900 billion level in effect before the financial crisis erupted in 2008.

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