Fed's Yellen touts caution given global risks to U.S

By Jonathan Spicer and Jennifer Ablan

NEW YORK (Reuters) - Federal Reserve Chair Janet Yellen said on Tuesday the U.S. central bank should proceed "cautiously" as it looks to raise interest rates, because inflation has not yet proven durable against the backdrop of looming global risks to the U.S economy.

In her first comments since the Fed decided to hold rates steady two weeks ago, Yellen again pointed to threats to the world's biggest economy including low oil prices and concerns over China's economy.

The comments, which boosted assets like U.S. stocks and bonds, appeared to push back on more hawkish recent comments from a handful of her colleagues.

"Developments abroad imply that meeting our objectives for employment and inflation will likely require a somewhat lower path for the federal funds rate than was anticipated in December," when the Fed raised rates for the first time in a decade, Yellen said at the Economic Club of New York.

"Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy," Yellen said, referring to the policy-setting Federal Open Market Committee.

At its March policy meeting, the Fed had nodded to an overseas slowdown and early-year market turmoil in justifying a pause to its policy tightening. At the time, Fed officials also downgraded economic expectations and predicted only about two more rate hikes this year, down from a December prediction of four.

On Tuesday, Yellen said she still expected that headwinds from weak growth abroad, low oil prices and uncertainty over China would abate and allow the recovery to continue.

"This expectation of fading headwinds," she said, is a key reason policymakers expect that "gradual increases" in rates will be appropriate. "The overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited," Yellen said.

Yellen said the Fed wanted to "get ahead" of that risk even though the U.S. economy has proven "remarkably resilient" in the face of significant foreign factors.

U.S. stocks and Treasury securities prices gained while the dollar dropped to a one-week low after Yellen's comments.

U.S. inflation measures have shown some recent strength, with the Fed's preferred annual measure flat at 1.7 percent in February, though still below its target of 2 percent. Another closely watched 12-month measure was up 2.3 percent from a year ago.

Yellen however remains cautious. "It is too early to tell if this recent faster pace will prove durable," she said, echoing her concerns from March 16.

The decent economic data at home, the rebound in oil prices, and relative tranquillity in global markets have prompted some other Fed officials to suggest another rate hike could come in April or June. San Francisco Fed President John Williams, a close ally of Yellen, said earlier on Tuesday the central bank should stay on track with its tightening plan.

Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc, said Yellen's caution "in itself is not a surprise, but it is a little bit of a surprise in light of the chorus of Fed speakers that we saw last week."

(Additional reporting by Howard Schneider; Editing by Chizu Nomiyama)