Janet Yellen, the Fed chair, has warned that the US risks a “nasty surprise” if it waits too long to continue raising interest rates, adding that she expects the US central bank to tighten monetary policy a few times a year until 2019.
But on the cusp of Donald Trump’s inauguration as an economy-focused president, she also said slow productivity growth meant the US’s “usual” rate of economic expansion would be “significantly slower than the post-world war two average”.
Mr Trump will inherit an economy in much stronger shape than the one left to President Barack Obama, with Ms Yellen noting in a speech that the US is close to maximum employment and that inflation is moving towards the Fed’s 2 per cent target.
Following the Fed’s December decision to raise short-term interest rates for the second time in a decade, Ms Yellen said on Tuesday: “Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road — either too much inflation, financial instability or both.”
Delaying could force the Fed to catch up by raising rates rapidly, she said, which could in turn push the economy into a new recession.
Providing new insights into the stance of Fed policymakers, she said: “As of last month, I and most of my colleagues . . . were expecting to increase our federal funds rate target a few times a year until, by the end of 2019, it is close to our estimate of its longer-run neutral rate of 3 per cent.”
Longer-term, she said that while economists did not fully understand the causes of a slowdown in US productivity growth, the trend implied lower-than-average growth and a neutral interest rate of 3 per cent — a full percentage point lower than the Fed’s estimate three years ago.
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