Janet Yellen speech: Rate hikes may prevent "boom-bust" cycle

Federal Reserve Chair Janet Yellen said it's important to keep raising interest rates gradually in order to be prepared to handle an overheating economy -- although indicators show overheating is nowhere in sight.

In her last address to Congress' Joint Economic Committee, Yellen said that if the Fed were too slow in raising rates incrementally, it might have to accelerate the rate hikes so much as to tip the economy into a recession.

"We don't want to cause a boom-bust economy," Yellen said. 

That's despite chronically low inflation, which Yellen called "extremely disappointing" and "puzzling." Still, she said she believes the low-inflation trend is temporary, and that inflation would eventually reach 2 percent, a level that the Fed considers desirable. 

Yellen's testimony was a strong signal that the central bank is ready to boost its policy rate for a third time this year when it meets in December. The target rate is currently 1 to 1.25 percent, up 75 basis points since last year.

Still, Yellen expressed concern about the labor market, which appears weaker than the low unemployment rate would seem to indicate. "I am very disturbed and have spoken out for years about rising inequality," both in wages and wealth, she said. 

"We've seen a long trend of disappearance of middle income jobs that could be either automated or outsourced. There remains a great deal of pain in the labor market," she noted. 

In response to a question, Yellen added, "The equity of the tax code is important and should be taken into account."

Wednesday's appearance is likely to be Yellen's last testimony to Congress. President Donald Trump has nominated Fed board member Jerome Powell to succeed Yellen as Fed chairman, and she intends to step down from the Fed once her term expires in February.

The Associated Press contributed to this report.