By Nick Timiraos 

Former Federal Reserve Chairwoman Janet Yellen said President Trump's attacks on the central bank could be counterproductive if they cause investors to doubt the Fed's commitment to keeping inflation in check.

Ms. Yellen said Monday at the annual convention of the Mortgage Bankers Association that she didn't think the central bank or her successor as Fed chairman, Jerome Powell, would be influenced by Mr. Trump's criticism last week, in which he said the Fed had "gone crazy" in its campaign to slowly raise short-term borrowing costs. That comment came amid the biggest selloff in stock prices in more than seven months.

Ms. Yellen said that in 1994, just as she was beginning a term on the Fed board of governors, she believed President Clinton was "very disturbed" that Fed rate increases might work against a deficit-reduction agreement he had steered through Congress. Mr. Clinton, however, chose not to publicly criticize the Fed for rising rates, she said, on the advice of his economic adviser, Robert Rubin.

Attacking the central bank for raising rates as it deemed necessary "would politicize the Fed," she said. "It would undermine the confidence that the Fed has a commitment to price stability and to politicize it and to undermine that is something that is essentially damaging to the Fed and to financial stability."

Ms. Yellen said Mr. Trump was entitled to express his view about monetary policy. "There's no law against that," she said. "But I don't think it's wise."

The former Fed leader, who resigned her post as Fed governor in February after her four-year term chairwoman expired, said the economy was in a sweet spot for now, but she worried that continued declines in the unemployment rate could reflect unsustainable growth that would require more aggressive rate increases if inflation moved higher.

"I am worried about the economy overheating," she said. If the economy continues to add more than 150,000 jobs per month, the unemployment rate will fall below from its current 3.7% level, a 49-year low, which could put pressure on prices and wages. The Fed seeks to keep inflation at a 2% target, which it regards as a sign of balanced growth.

"We do have to worry about inflation picking up over time," she said.

The root of her concern, which is shared among some former senior Fed officials, is that the economy's current growth rate of more than 3% can't be sustained over time. If the economy keeps growing beyond what it can sustain over the long run, it could lead to higher inflation that would require a longer or more aggressive campaign by the Fed to raise rates.

The Fed has raised rates three times this year, most recently in September, to a range between 2% and 2.25%. Most Fed officials have projected another percentage point in increases will be needed through 2019.

"The Fed has a tricky task in front of it" to slow the economy's growth rate without causing a recession, said Ms. Yellen. While such a soft landing is possible, she said the Fed would need to be "skillful and lucky" to achieve it.

Ms. Yellen said she wasn't overly concerned about a so-called inversion of the yield curve, when short-term rates rise above long-term rates. Yield-curve inversions have typically predated recessions, but Ms. Yellen said unusual factors in the bond market that have lowered the premium investors demand for holding longer-term bonds have made the yield-curve signal less reliable than in the past.

"If I were sitting there and asking myself the question, 'should the Fed absolutely stop before the yield curve inverts,' I might be willing to say this time is different."

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

October 15, 2018 13:12 ET (17:12 GMT)

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