WASHINGTON (Reuters) - The U.S. economy has gathered steam this year and will warrant continued interest rate increases amid a strengthened global recovery, outgoing Federal Reserve Chair Janet Yellen told Congressional leaders on Wednesday in her final scheduled testimony on Capitol Hill.
Her valedictory session before the Joint Economic Committee described an economy where the jobs market remains strong and economic growth has hit three percent for two quarters running, above the Fed's estimate of U.S. potential and likely enough for an expected December rate increase.
It also became a forum for a subtle challenge by Yellen to some of the ideas underlying the Republican tax plan, particularly the idea that a corporate tax cut would increase workers' wages.
The connection is tenuous, Yellen said in response to lawmakers' questions, requiring that businesses use the extra money to invest, raise productivity, and then pass some of the benefits along to workers.
But those impacts "are very hard to detect in economic data. It is not strong enough or pronounced enough to come across in a clear way," she said in testimony that consistently steered lawmakers toward reforms she feels could boost the economy's capacity to grow -- including improved education and policies targeted to raise investment and innovation.
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"The equity of the tax code should, importantly, be taken into account," Yellen said in response to a question about income inequality. "We are suffering from slow productivity growth. In making fiscal policy and other decisions the focus should be on how that can be improved."
The path of the federal debt, meanwhile, "should keep people awake at night."
Though the themes are familiar, Yellen spoke as Congress is debating a tax bill partly premised on the argument that lower corporate taxes will raise wages and, while adding initially to the debt, leave the economy better off overall.
Her comments as an outgoing Fed chief stood in contrast to the more cautious responses of Fed Gov. Jerome Powell, Trump's nominee to replace her. At his confirmation hearing on Tuesday, Powell largely sidestepped discussion of the tax plan.
Yellen, as has been her style over four years, turned even basic queries into disquisitions on the underlying dynamics of inflation and the labour force.
In general, however, she laid out a fairly rosy scenario for Powell to inherit, with unemployment as low as it has been in nearly two decades, at 4.1 percent, and, she argued, inflation set to rebound to the Fed's two percent target.
"The economic expansion is increasingly broad based across sectors as well as across much of the global economy," Yellen said in prepared remarks delivered to the Joint Economic Committee.
Treasury bond yields and the dollar were firm through midday.
She did not comment on the timing of the next rate increase, which markets now expect and which Fed officials have telegraphed will come during the upcoming Dec. 12-13 policy meeting. At his Tuesday hearing, Powell said the case for a December rate increase was "coming together."
The one question mark involves inflation, which has fallen this year and has been consistently below the Fed's 2 percent target. Some policymakers feel the Fed should not raise rates until inflation accelerates.
Yellen, recounting the history of inflation since the 2007 to 2009 financial crisis, said a lull this year in the pace of price rises will prove "transitory," and that it was wise for the Fed to continue gradual rate increases so it does not have to catch up with a faster round of increases later.
"We don't want to cause a boom-bust set of conditions," Yellen said. "I would love to see a sustainably strong labour market" rather than court a recession with faster than expected rate increases should inflation spike.
On a day after the stock market touched new records, Yellen said that while asset values were "high by historical standards, overall vulnerabilities in the financial sector appear moderate."
(Reporting by Howard Schneider; Additional reporting by Jason Lange and Lindsay Dunsmuir; Editing by Chizu Nomiyama and Andrea Ricci)
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