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Fed chair hints rates may rise sooner than expected

Janet Yellen, Federal Reserve chairwoman, said that the Fed may need to raise interest rates sooner than expected, but it all will hinge on the labor market.

"If the labor market continues to improve more quickly than anticipated by the Federal Open Market Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned," Yellen testified to the Senate Banking Committee.

She then added, "if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated."

Currently, the majority of Fed officials expect the central bank to begin raising interest rates about a year from now. The Fed's benchmark short-term rate has stayed near zero since December 2008, which has helped to keep interest rates near historical lows.

Recently, the unemployment rate has fallen rapidly, reaching 6.1 percent in June. But wage growth has remained weak, Yellen noted.

Also, Yellen said, the housing market remains sluggish, which she said could slow the economic recovery.

"The housing sector has shown little recent progress," Yellen testified to the Senate. "While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year's increase in mortgage rates, and readings this year have, overall, continued to be disappointing.

"The recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery."

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