With the US economy close to full employment and inflation headed toward the Federal Reserve’s 2 percent goal, it “makes sense” for the US central bank to gradually lift interest rates, Reuters reports, citing Fed chair Janet Yellen.
“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,” Yellen told the Commonwealth Club of California in San Francisco.
“In that scenario, we could be forced to raise interest rates rapidly, which in turn could push the economy into a new recession.”
The Fed raised short-term rates last month for only the second time since the 2007-2009 financial crisis, when it slashed rates to near zero and began buying massive amounts of Treasuries and mortgage-backed securities to push down long-term borrowing costs.
The rate increase in December reflected confidence the U.S. economy will continue to recover, Yellen said.
The Fed chief said that she and other Fed policymakers expected the central bank to lift its key benchmark short-term rate “a few times a year” through 2019, putting it near the long-term sustainable rate of 3 percent.
That pace could change depending on how the outlook for the economy develops, Yellen said.
“The economy is vast and vastly complex, and its path can take surprising twists and turns.”
Benchmark US Treasury yields rose and the dollar strengthened after the remarks. Yellen said asset valuations including stock prices in part reflect expectations that the Fed will normalize rates faster than other central banks.
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