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.

Speaking 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.

Get alerts on Federal Reserve when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.

Follow the topics in this article