Federal Reserve Chair Janet Yellen said it is appropriate forU.S. central bankers to “proceed cautiously” in raising interestrates because the global economy presents heightened risks.

The speech to the Economic Club of New York made a strong casefor running the economy hot to push away from the zero boundary forthe Federal Open Market Committee's target rate.

“I consider it appropriate for the committee to proceedcautiously in adjusting policy,” Yellen said in the text ofprepared remarks Tuesday. “This caution is especially warrantedbecause, with the federal funds rate so low, the FOMC's ability touse conventional monetary policy to respond to economicdisturbances is asymmetric.”

U.S.Treasuries extended gains following her remarks, while the dollarweakened and U.S. stocks erased earlier losses. The Standard &Poor's 500 Index was up 0.2 percent to 2,041.03 at 12:22 p.m. inNew York, after falling as much as 0.4 percent.

“Yellen has doubled down on the dovishness from the Marchstatement and press conference,” said Neil Dutta, head of U.S.economics at Renaissance Macro Research LLC in New York. “Globaleconomic developments are cited very prominently.”

Fed officials left their benchmark lending rate target unchangedthis month at 0.25 percent to 0.5 percent while revising downtheir median estimate for the number of rate increases that will bewarranted this year to two hikes, from four projected inDecember.

Yellen said the FOMC “would still have considerable scope” toease policy if rates hit zero again, pointing to forward guidanceon interest rates and increases in the “size or duration of ourholdings of long-term securities.”

“While these tools may entail some risks and costs that do notapply to the federal funds rate, we used them effectively tostrengthen the recovery from the Great Recession, and we would doso again if needed,” she said.

Fed officials' quarterly economic forecasts for the U.S. didn'tchange much in March, while Yellen stressed in a March 16 pressconference that their sense of risks from global economic andfinancial developments had mounted.

Yellen mentioned two risks in her speech. Growth in China isslowing, she noted, and there is some uncertainty about how thenation will handle the transition from exports to domestic sourcesof growth. A second risk is the outlook for commodity prices, andoil in particular. Further declines in oil prices could have“adverse” effects on the global economy, she said.

Since the March meeting, Fed officials have seen more evidencethat the pace of domestic growth may be slowing. U.S. grossdomestic product decelerated to 1.4 percent pace in the fourthquarter, while the Atlanta Fed's GDPNow estimate for the firstquarter is 0.6 percent, partly due to slower rates of consumerspending growth.

On the other hand, inflation measures have shown a trend ofgradual firming. The personal consumption expenditures price indexminus food and energy rose 1.7 percent for the year ended February,the fastest pace in three years.

Yellen said she was confident that inflation would graduallyreturn to the Fed's 2 percent goal over time, while noting that thecourse of prices was a two-sided risk.

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