U.S. Fed chair prefers monetary policy tightening in prudent, gradual manner

U.S. Federal Reserve Chair Janet Yellen said on Thursday that the Central Bank will tighten the monetary policy in a way or at a pace that would not threaten continued progress in the labor market.

"My own preference would be to proceed with tightening in a prudent and gradual manner," Yellen told the Senate Banking Committee on Thursday on her second day of congressional testimony.

As the U.S. labor market is getting closer to a "more normal state" and headwinds holding back the economy are diminishing, it becomes appropriate to raise interest rates, the Central Bank governor said.

In order to proceed with tightening without threatening the labor market progress and given the low inflation level, the Central Bank could be patient in removing accommodation, she said.

She repeated that the Fed is on track to raise interest rates later this year, as most Fed officials expect the economy to gain growth momentum over the remainder of this year. She also stressed that waiting too long to raise interest rates could cause the Fed to "overshoot" its goals for full employment and inflation stability, and could force the Central Bank to tighten policies in a sharp way.

In the testimony, Yellen said she would be open to a modest increase in the threshold for determining a bank's systemic importance. She added that it's critical for the Fed to maintain its discretion over systemically important banks, if the threshold changes.

According to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, all U.S. banks with assets over 50 billion U.S. dollars are classified as systemically important financial institutions, which should be subject to tough regulatory rules. Endi