Federal Reserve chief Janet Yellen has forecast that economic conditions will prompt the US central bank to hike interest rates this year “at a gradual pace”.
Ms Yellen was speaking at the University of Massachusetts yesterday (September 24) a week after the Federal Open Market Committee (FOMC) voted to keep interest rates on hold in September.
She said: “Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.”
She acknowledged the risks of holding off raising the federal target funds rate for too long.
Ms Yellen explained: “If the FOMC were to delay the start of the policy normalisation process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals.
“Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. In addition, continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability.”
US interest rates have been at 0 to 0.25 per cent since December 2008.
In her speech, the Fed chief acknowledged the economic outlook remained “highly uncertain” and admitted the FOMC could not know when the headwinds “still restraining the domestic economy will continue to fade”.
Ms Yellen added: “But I expect that inflation will return to 2 per cent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored.”
