Fed chief Yellen sees likely rate hike starting this year

US Federal Reserve chairman Janet Yellen said on Friday the central bank will start raising borrowing costs later this year, but emphasized the return to normal interest rates will be gradual and would depend on available economic data.

''With continued improvement in economic conditions, an increase in the target range for that rate may well be warranted later this year,'' she said, adding that the timing of the first increase in the federal funds rate and its subsequent path will be determined by on the basis of incoming data on labor market conditions, inflation, and other aspects of the current expansion.

The Fed, which has held short-term borrowing costs near zero since December 2008, is likely to increase borrowing costs for the first time since 2006.

While the policymakers will not wait for inflation to near the Fed's 2-per cent goal before tightening monetary policy, Yellen said a downturn in core inflation or wage growth could force the central bank to delay a rate hike.

"The actual path of policy will evolve as economic conditions evolve, and policy tightening could speed up, slow down, pause, or even reverse course depending on actual and expected developments in real activity and inflation," Yellen said at a monetary policy conference at the Federal Reserve Bank of San Francisco.

After more than six years of maintaining a near-zero federal funds rate and accumulating a large portfolio of longer-term securities, the Federal Open markets Committee is now giving serious consideration to beginning to reduce later this year some of the extraordinary monetary policy accommodation currently in place, she said.

She cited a quickening in the pace of recovery of the labour market in recent years, although it has been slow for a long time after the deep recession following the financial crisis.

''US unemployment rate has fallen markedly over the past few years and now stands at 5.5 per cent, down from 10 per cent at its peak. Payroll gains have averaged 275,000 per month over the past year, well above the pace needed to sustain further declines in the unemployment rate.''

While the unemployment rate has not yet declined to the 5.0 to 5.2 per cent range that most FOMC participants now consider to be normal in the longer run, Yellen said ''I am cautiously optimistic that, in the context of moderate growth in aggregate output and spending, labor market conditions are likely to improve further in coming months.

In particular, and despite the somewhat disappointing tone of the recent retail sales data, I think consumer spending is likely to expand at a good clip this year given such robust fundamentals as strong employment gains, boosts to real incomes from lower energy prices, continued increases in household wealth, and a relatively high level of consumer confidence.''

US Treasury yields fell and held near session lows on Friday after the mildly hawkish comments and as investors bought bonds ahead of month-end rebalancing.

US rate futures, however, kept their bets that the Fed will wait until October to raise rates.