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By Howard Schneider and Jason Lange
WASHINGTON, Nov 17 (Reuters) - The election of Donald Trump as U.S. president has done nothing to change the Federal Reserve's plans for a rate increase "relatively soon," Fed Chair Janet Yellen said on Thursday in Congressional testimony that included a pledge to serve out her term.
Yellen said the U.S. central bank would change its outlook as necessary as the new administration rolls out plans for perhaps hundreds of billions of dollars in tax cuts and additional government spending. She also suggested the new government keep in mind that the United States is near full employment and inflation may be rising.
"Markets are anticipating ... a fiscal package that involves a net expansionary stance of policy and that in a context of an economy that is operating reasonably close to maximum employment with inflation heading back to 2 percent," Yellen said, suggesting new programs focus on "policies that would improve ... long run growth and productivity."
There had been some uncertainty about how Yellen would interact with a new president who at turns during the campaign spoke favorably of the Fed's low rate policies, and yet also accused the Fed of acting politically to help Democratic nominee Hillary Clinton.
Trump, during his election campaign, had also said he would replace Yellen when her term expires. Asked directly by a member of the Joint Economic Committee on Thursday, Yellen said she planned to serve out her term as chair, which ends in 2018.
While the election has not affected matters yet, they may find themselves at odds if Trump, for example, pursues a roll-back of financial regulations.
On that topic, Yellen cautioned against any effort to "turn back the clock" on the Dodd-Frank financial regulations approved following the 2007 to 2009 financial crisis because that could make a repeat more likely.
For the time being, Yellen said, incoming economic data justified a rate hike "relatively soon" and, absent any dramatic changes, a gradual pace of hikes after that.
So far she said there was little risk the Fed had fallen behind the curve and would lose control of inflation.
"The evidence we have seen since we met in November is consistent with our expectation of strengthening growth and improving labor markets and inflation moving up," Yellen said. "The risk of falling behind the curve in the near future appears limited."
However the chair also acknowledged the uncertainty that may lie ahead as President-elect Trump rolls out his program.
"When there is greater clarity about the economic policies that might be put into effect the (Federal Open Market Committee) will have to factor those assessments of their impact on employment and inflation and perhaps adjust our outlook," Yellen said.