Fed's Yellen sees gradual rate hikes starting this year

(Reuters) - Federal Reserve Chair Janet Yellen signaled that the U.S. central bank will likely start raising borrowing costs later this year, even before inflation and wages have returned to health, but emphasized the return to normal interest rates will be gradual.

A downturn in core inflation or wage growth could force the Fed to delay the first increase to borrowing costs since 2006, the central bank's chief said on Friday, but policymakers should not wait for inflation to near the Fed's 2-percent goal before tightening monetary policy. The Fed has held short-term borrowing costs near zero since December 2008.

After the first rate increase, Yellen said, a further, gradual tightening in monetary policy will likely be warranted. If incoming data fails to support the Fed's economic forecast, the path of policy will be adjusted, she said.

"With continued improvement in economic conditions, an increase in the target range for that rate may well be warranted later this year," Yellen said at a monetary policy conference at the Federal Reserve Bank of San Francisco.

Yellen added that while the Fed is giving "serious consideration" to beginning to reduce its accommodative monetary policy, the timing and the path of a Fed hike would depend on the incoming economic data.

"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.

U.S. 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.

Still, traders of U.S. rate futures kept their bets that the Fed will wait until October to raise rates.