Yellen says economy on track, defends Fed "transparency"

By Howard Schneider and Michael Flaherty

WASHINGTON (Reuters) - Federal Reserve Chair Janet Yellen said on Wednesday the U.S. central bank remains on track to raise interest rates this year, with labor markets expected to steadily improve and turmoil abroad unlikely to throw the U.S. economy off track.

"If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate," Yellen said in testimony prepared for the U.S. House of Representatives Financial Services Committee, affirming the view of a central bank prepared to gradually raise rates after more than six years at a near-zero level.

Labor markets are "not yet consistent with maximum employment," she said. "Greece remains difficult. And China continues to grapple with the challenges posed by high debt, weak property markets, and volatile financial conditions."

Still, "looking forward, prospects are favorable for further improvement in the U.S. labor market and the economy more broadly."

Her written statement to the committee is to be followed by a hearing later Wednesday morning. The statement largely tracked her recent public comments, as well as the most recent policy statement by the Fed's policy-setting committee.

She did, however, include an explicit defense of the Fed's "transparency and accountability," detailing the central bank's flow of information to financial markets and its press conference and audit schedules as evidence it does not need further congressional oversight.

She will likely be questioned on that very point from members of the Republican-led House committee. House members were critical of the Fed at her previous appearance before them in February. In the intervening months some lawmakers have expressed frustration over the fact that the Fed has not released all of the material Congress has requested as part of an investigation of the possible leak of information from the central bank to an economic consulting company in 2012.

Yellen has said the Fed had declined to send the information because a separate Justice Department probe is ongoing.

Yellen's statement was submitted to the committee along with a lengthier report from the Fed board on the state of the economy and financial markets.

That report included more detail on what the United States faces as it tries to go its own way in a weakened world economy. The expectation that the Fed will diverge from Europe, Japan and other central banks and begin raising rates has pushed up the value of the dollar, and driven down exports and U.S. growth, making the Fed's outlook less certain, the report said.

The report also noted concerns about a possible liquidity crisis if bond markets become stressed, an issue some investors and market analysts have cited as a potential source of future trouble. The staff report said that while there is some evidence bond markets are not as "deep" or liquid as they used to be, there is not convincing evidence of "notable deteriorations."

(Reporting by Howard Schneider; Editing by Paul Simao)