Fed chair Yellen says ‘makes sense’ to gradually raise US interest rates

With the U.S. economy close to full employment and inflation headed toward the Federal Reserve’s 2 per cent goal, it “makes sense” for the US central bank to gradually lift interest rates, Fed Chair Janet Yellen said on Wednesday.

“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 said in remarks prepared for delivery to 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 interest 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 rise last December reflected confidence the economy will continue to recover, Yellen said.

The Fed chief added 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 per cent.