The remarks came as she joined a dialogue session at the HSBC Global Investment Summit in Hong Kong.
Speaking at the event, Yellen acknowledged the Iran war had precipitated “a broad supply shock”, spreading from pump prices to LNG, fertilisers, food, shipping costs, as well as semiconductors, due to a shortage of helium.
Despite the inflationary pressures, Yellen, who was also chair of the Federal Reserve between 2014 and 2018, noted that a rate cut by the US central bank was still likely given concerns about the labour market.
“Long-run inflation expectations have remained low and stable. Short-term inflation expectations are up slightly, but they’re going to watch all of that very carefully, and I think they have an open mind,” she told participants.
“If I had to write one thing down on a piece of paper, if I’m going into the next FOMC meeting where the forecasts are produced, I suppose my guess would be that maybe there would be a cut later in the year. I think that’s entirely possible.
“But gee, a lot of things are possible,” she said.
Last month, Fed policymakers opted to keep benchmark interest rates steady at their current range of between 3.5 and 3.75 percent, and a majority projected at least one rate cut would likely be appropriate this year.
But minutes from the latest Fed meeting, released last week, also showed a growing number of officials felt that interest rate hikes might be needed to counter inflation, which continues to exceed the central bank’s two percent target.
The six-week Iran war has resulted in financial market upheaval as investors weigh the potential impact on inflation and interest rates in major economies around the world.
The conflict has sent crude oil prices surging more than 30 percent.
US consumer prices increased by the most in nearly four years in March amid a record surge in the cost of gasoline and diesel.
Traders have now priced out any wagers on a Fed rate cut this year, compared with bets for roughly two cuts at the start of this year.
The next Federal Open Market Committee (FOMC) meeting is set to convene between the 28th and 29th later this month.
Regarding the White House’s sustained political pressure on the central bank, Yellen said US President Donald Trump has “looked for every possible route that he could take” to “get his way with the Fed”.
She also said that calls from Trump to lower interest rates risk undermining the credibility of US policymaking.
“How often does a president of a developed country, where our currency is the dominant reserve currency, express the view that interest rates should be set to reduce the debt service costs of the federal debt?” she said.
“When you hear words like that, that’s what you hear in a banana republic.”
On Sino-US relations, Yellen noted that Beijing and Washington have a deep trade and investment relationship that is beneficial to both sides.
“It’s something we should want to preserve, should value, and the lion’s share of it is, frankly, very uncontroversial, and so we want to make sure that we preserve that relationship and see it thrive,” she said.
“In other words, I don’t want to see a decoupling of the United States with China.” (Additional reporting by Reuters)
