By David Harrison 

Federal Reserve Chairwoman Janet Yellen said Thursday she doesn't see the U.S. economy at risk of overheating and doesn't expect growth to pick up much soon, comments suggesting the central bank is sticking to its plan of raising interest rates cautiously and gradually in the months ahead.

Ms. Yellen's remarks, prepared for delivery at Stanford University, offered a counterpoint to many investors who think the incoming Trump administration's plans for tax cuts and more government spending will boost growth, possibly fueling faster inflation and steeper Fed rate increases. Instead, she struck a steady-as-she-goes tone in her remarks.

Speaking on the eve of Donald Trump's inauguration as the 45th U.S. president, she said the economy remains constrained by multiple long-term forces.

"Economic growth more broadly seems unlikely to pick up markedly in the near term given the ongoing restraint from weak foreign demand," rising interest rates, an aging population and other factors, she said.

Still, she said, the Fed doesn't want to wait too long to raise rates and let inflation get out of control. So, it will likely be "prudent to adjust the stance of monetary policy gradually over time," she said, repeating the language she and other Fed officials have used recently to describe their expected pace of rate increases.

Fed officials last month raised their benchmark federal-funds rate by a quarter percentage point to a range between 0.50% and 0.75% and penciled in three quarter-point increases this year.

They are unlikely to lift the rate at their next policy meeting Jan. 31-Feb. 1, so soon after their December move, preferring to wait to see how the economy performs in its wake. On Thursday, ahead of Ms. Yellen's speech, traders saw a roughly 75% probability that officials also would stand pat at their following meeting March 14-15, according to CME Group.

Minutes of the Fed's December meeting showed almost all the officials believed then that new tax and spending policies could cause faster growth, but it was too early to know how they would be implemented and affect the economy.

On Thursday, Ms. Yellen emphasized that factors besides the Trump agenda will also influence the Fed's interest rate decisions over time. "The course of monetary policy over the next few years will depend on many different factors, of which fiscal policy is just one," she said.

Ms. Yellen spoke against the backdrop of a strengthening U.S. economy. The labor market is running at near full strength and workers are starting to see meaningful raises for the first time since the recession. Average hourly earnings were up 2.9% in December from the previous year.

Inflation is also starting to rise as the effects of the dollar's appreciation have worn off and as energy prices have risen. A gauge of consumer prices showed a 2.1% increase in December versus the previous year. The Fed's preferred inflation gauge was up 1.4% on the year in November, matching the fastest pace since October 2014. Fed officials have indicated they expect it to climb through the next couple of years and eventually reach the central bank's 2% target.

At the same time, she dismissed concerns that the Fed might be raising rates too slowly, risking a dangerous take off in inflation.

"With the unemployment rate near its longer-run normal level and likely to move a bit lower this year, a natural question is whether monetary policy has fallen behind the curve," she said. "The short answer, I believe, is 'no.' "

She said though unemployment is low, at 4.7%, recent modest wage gains "do not seem consistent with an overheated labor market. Moreover, signs of overheating in the broader economy are also scarce."

Write to David Harrison at david.harrison@wsj.com

(END) Dow Jones Newswires

January 19, 2017 20:14 ET (01:14 GMT)

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