WASHINGTON—A course of gradual increases in the federal funds rate will help sustain a healthy labor market and stabilize inflation, Federal Reserve Chair Janet Yellen said Sunday. Speaking to the International Banking Seminar here, Yellen said she expects inflation to pick up next year after lagging projections over the past several months both domestically and globally, and to reach 2% by 2019.

Noting that the Federal Open Market Committee has continued its policy of gradual policy normalization, Yellen reiterated that the FOMC has initiated its balance sheet normalization program. The program, announced in June, “will gradually scale back our reinvestments of proceeds from maturing Treasury securities and principal payments from agency securities.”

Specifically, the Fed projects that for October through December of this year, the decline in the its securities holdings will be capped at $6 billion per month for Treasury securities and $4 billion per month for agency securities. These caps will gradually rise over the course of the following year to maximums of $30 billion per month for Treasury securities and $20 billion per month for agency securities and will remain in place through the process of normalizing the size of the Fed's balance sheet.