According to economists, a President making policy decisions for the Federal Reserve would most likely result in higher inflation. The Fed would probably come under pressure from most presidents to maintain its benchmark interest rate lower than it otherwise would, increasing inflation.

James Bullard, a former president of the Federal Reserve Bank of St. Louis and member of the Fed’s policy committee from 2008 to 2023, said, “The data is quite clear that you’re going to get greater and more volatile inflation eventually if you give up an independent central bank.”

The “stagflation” era served as a warning, according to Sarah Binder, a political science professor at Georgetown University and an authority on how politicians affect the Fed. She added that presidents Richard Nixon and Lyndon Johnson put pressure on the Federal Reserve to cut interest rates, which contributed to the double-digit inflation and economic stagnation of the 1970s.

She told Investopedia, “The past of the 1970s demonstrates that such type of political pressure contributed to releasing inflation for nearly a decade. While it’s not a given that the Fed will submit to Trump’s demands, it does put the Fed in a very vulnerable political position.”

The independence of the Fed

The Federal Reserve is a unique branch of the American government since it is intended to be somewhat immune to political influence.

A series of bank failures led to the Fed’s establishment in 1913 to stabilize the financial system. Over time, the central bank’s authority increased. These days, its duties include overseeing banks and, most importantly, determining the monetary policy of the world’s largest democracy.

In 1977, Congress gave the Fed a twin mandate: maintain full employment in the economy while controlling inflation. It primarily accomplishes this by influencing the fed funds rate, which establishes the interest rate at which banks in the country lend money to one another. This affects interest rates on a wide range of other loans across the economy, including personal and corporate loans like mortgages.

A committee consisting of a rotating group of one-year regional bank presidents and presidential appointees with 14-year tenure decides whether to raise or cut interest rates.

The Federal Open Market Committee (FOMC) is freer than other federal agencies to function as technocrats and make decisions based on what they believe to be sensible economic policy rather than political considerations because the president can only appoint a small number of FOMC members during any given term in office—at least in theory.

The goal of the Fed’s detractors has always been to give the other arms of government more authority over the central bank. They frequently contend that because of the Fed’s independence, the public cannot hold it accountable, rendering its governance undemocratic. The Fed’s economists have also come under fire for being unelected bureaucrats and for being ineligible to decide on matters of economic policy.

Should Fed be politicised?

The Fed has gained a lot of attention due to its gradual hike in the fed funds rate, which it used to control inflation that had grown well beyond its objective of 2%. Currently, the benchmark rate range has been at a 23-year high of 5.25%–5.50% since July 2023.

Because of the restrictive monetary policy’s contribution to lower inflation, investors and consumers now have hope that interest rate reductions are imminent. But before loosening policy, Fed policymakers have stated that they need further assurance that pricing pressures are under control.

Economists caution that a Fed under the president’s direction is more likely to allow inflation to spiral out of control.

According to Victor Li, a Villanova economics professor, presidents have every right to encourage the Fed to cut interest rates and have done so in the past, in part because election cycles force them to look short-term.

A president should be proud of the fact that the economy grows, the Fed lowers interest rates, loans become more affordable, consumers borrow more money to purchase more goods, businesses hire more workers, and the economy expands.

The inevitable hangover, however, sets in when business owners discover that their more affluent clientele can afford to pay greater rates, so they do. Even worse, economists have shown that because inflation is partially a psychological phenomenon, public perceptions of it can become self-fulfilling.

Li stated, “Inflation is a lagging indicator.” But when it does, it can quickly get out of hand and turn into hyperinflation if inflation expectations are no longer grounded. This is history’s lesson, and if it is not grasped, it will inevitably be repeated.

Li and other economists cited Richard Nixon as an example, who pushed Fed Chair Arthur Burns to maintain low interest rates in the run-up to the 1972 election. Burns cooperated even though he was a well-respected economist and ought to have known better. This contributed to the country’s 1970s double-digit inflationary wave.

How much should Fed be influenced?

In their book “The Myth of Independence: How Congress Governs the Federal Reserve,” Binder and colleague researcher Mark Spindel from Georgetown University noted that Fed officials do take the public’s opinion, political opinion, and financial markets into account when making decisions. Transcripts of FOMC sessions made available to the public five years later, reflect their worries.

Congressmen in Congress, to whom Fed officials are answerable, often pressure them to adjust interest rates during open hearings. But even if Congress has changed the Fed throughout the years, the FOMC still has the last word on monetary policy.

Bullard, the former president of the St. Louis Fed, stated that “if it came right down to it, the Congress could do whatever it wants with monetary policy, so in that sense, it is political.”

However, after considering this for the past 100 years, Congress chose to keep it apart from the daily ups and downs in politics.

The public’s perception that the Fed will maintain inflation at its long-term target of 2% is a major factor in the Fed’s capacity to control inflation. A president’s obvious thumbs-up on the scales may jeopardise that.

According to Binder, “the Fed’s difficulty is its legitimacy and credibility. All of this boils down to the public’s trust that the Fed is capable and will carry out its tasks methodically, that it won’t just flap in the wind, blown about by rival political parties or beliefs.”

Binder is also concerned that the Fed would overreact in the other direction, maintaining excessively high interest rates in an attempt to maintain its credibility, which would needlessly hurt the economy by making money too scarce.

Stories from across the globe

Chief economist at Pantheon Macroeconomics, Ian Sheperdson, cited Britain as an example, where the elected government controlled the central bank until 1997. The Bank of England underwent a more independent reform to its leadership structure that same year. Coincidentally, that year saw Britain’s inflation, which had historically been several percentage points higher than that of the United States and Germany, drop to par with its counterparts in the economy.

The International Monetary Fund, the UN’s financial arm, conducted a study of 17 Latin American countries in 2022 and discovered that those with more independent central banks often had lower inflation rates.

Another striking illustration of the connection between politics and inflation comes from Turkey. Tayyip Erdogan, the authoritarian leader, experimented with an unconventional economic theory: that cutting interest rates would lower inflation. Rather, the rate of inflation reached 85.5% in 2023 before the central bank started to implement a more conventional strategy and increased interest rates.

Congress would ultimately decide whether to alter the Fed’s organisational structure. Bullard stated that, based on his discussions with lawmakers, he believes there is a minimal probability of that occurring.

Bullard stated that in casual discussion, “Even folks that you think could be kind of more extreme, either on the left or the right, they’re quite supportive. I didn’t get the impression that they were considering fundamentally altering the Fed’s structure.”

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Spot gold rose by 0.1% to USD 1,915.22 per ounce, hovering close to its lowest level since March 16 at USD 1,910. US gold futures stayed flat at USD 1,924.10.

“Strong economic data (in the U.S.) strengthened the dollar to send gold back towards its June-low overnight,” said Matt Simpson, senior market analyst at City Index, while interacting with Reuters, as the expert added that the bullion appeared to be technically driven with bears booking profits.

The latest data indicated that the American economy remained on solid footing, which could lead to more rate hikes to bring down domestic inflation.

Investors now expect a 77% chance of a rate hike in July 2023, with frequent rate cuts seen from March 2024 onwards, predicted CME Group’s Fedwatch tool, as it further stated that most major American banks were expecting a 25-basis-point rate hike.

As per the market theories, high-interest rates often discourage investing in non-yielding gold.

The Fed will publish minutes of its June 13-14 meeting on July 5, while holding its Federal Open Market Committee (FOMC) on possible interest rate changes from July 25-26.

Investors will have an eye over the Personal Consumption Expenditure (PCE) price index data for May 2023, along with the stats on the weekly jobless claims for the week ended June 23.

Gold might not see any big moves even after the PCE data’s publication, unless the CPI witnesses sudden volatility, Simpson highlighted, while noting that the Federal Reserve could maintain a hawkish approach to tame the inflation as it still remains above the central bank’s 2% yearly target.

Talking about Jerome Powell, the Fed Chair will address an event in Portugal, along with Bank of England’s Andrew Bailey, European Central Bank’s Christine Lagarde and Bank of Japan’s Kazuo Ueda.

The profits of the industrial firms in China (world’s largest gold consumer), tumbled 18.8% in the first five months of 2023, thus reinforcing market expectations of further policy support.

Spot silver fell 0.1% to USD 22.87 per ounce, platinum was down 0.8% while palladium fell nearly 1% to USD 1,283.06.

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Price stability and full employment, the United States’ Federal Reserve’s two legally mandated goals, are necessary to ensure a healthy and expanding economy in the global powerhouse. The Fed has done this in the past by changing reserve requirements, doing open market operations (OMO), and changing short-term interest rates. The Fed has also developed new ways to fix the economy since the subprime crisis started in 2007. What are these instruments, and how do they lessen the effects of a recession? First, let’s examine the Fed’s toolbox.

Talking about Fed’s policy stance for 2023, it has already released the hypothetical scenarios for its annual stress test, which will help it to ensure that large banks are able to lend to households and businesses during a severe recession.

“This year, 23 banks will be tested against a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets,” the Fed communication remarked.

The Federal Reserve Board’s stress test generally evaluates the resilience of large banks by estimating losses, net revenue, and capital levels, which provide a cushion against losses, under hypothetical recession scenarios, that may extend two years into the future.

Critical Points

The Federal Reserve is the central bank of the United States. Its job is to set monetary policy and control the amount of money in circulation. The Fed’s two main instruments (OMO) are interest rate setting and open market operations.

Among other less common ways to help failing banks, the Fed can change the legal reserve requirements for commercial banks or act as a lender of last resort.

These measures allow the Fed to implement an expansionary monetary policy when the economy is struggling. It can resort to unconventional measures like quantitative easing if that doesn’t work.

Interfering with Interest Rates

The Fed and other central banks worldwide employ short-term interest rate manipulation as their primary instrument. Simply put, this strategy is increasing/decreasing interest rates to slow/boost economic growth and manage inflation.

The mechanics are pretty straightforward. By lowering interest rates, borrowing money becomes more affordable and saving money becomes less profitable, encouraging people and businesses to spend. As a result, savings drop as interest rates fall, more money is borrowed, and more money is spent. Also, the overall amount of money in the economy rises as borrowing levels do. So, lowering interest rates has the excellent side effect of making people save less and spend more, which is good for the economy as a whole.

Conversely, decreasing interest rates also tend to raise inflation. This has a negative side effect since, in the near term, the total supply of commodities and services is fundamentally finite. When more money competes for a limited number of items, prices rise. The economy experiences various undesirable side effects if inflation becomes too high. The key to manipulating interest rates is not to go too far and start inflation by accident. Although this approach to monetary policy is flawed, it is still preferable to taking no action.

System of Federal Reserve (FRS)

Public Market Transactions

Open market operations (OMO), in which the Fed purchases or sells Treasury bonds on the open market, are the Fed’s other primary weapon. Because OMO can change interest rates and the overall money supply, it is comparable to directly influencing interest rates. This process’ rationale is relatively straightforward.

When the Fed purchases bonds on the open market, it expands the money available to the general public by exchanging the bonds for cash. In contrast, if the Fed sells bonds, it reduces the money supply because it takes money out of circulation in return for bonds. OMO thus has a direct impact on the money supply. OMO also affects interest rates because when the Fed purchases bonds, prices are pushed up, and swiftness is lowered; conversely, when the Fed sells bonds, prices are pushed down, and rates are raised.

Hence, OMO has the same effect as direct manipulation of interest rates in terms of lowering rates/increasing money supply or raising rates/decreasing money supply. The essential distinction, however, is that OMO can apply to bonds of any maturity to alter the money supply since the size of the U.S. Treasury bond market is so enormous.

Prerequisites for Reserves

The amount of reserves a bank must retain about specific deposit liabilities is determined by the reserve requirements, which are subject to adjustment by the Federal Reserve. Therefore, based on the required reserve ratio, the bank must hold a portion of the specified deposits in vault cash or warranties with the Fed-backed banks.

The Fed can also effectively raise or lower the amount these facilities lend by altering the reserve ratios imposed on depository institutions. For instance, if the bank gets a USD 500 deposit and the reserve requirement is 5%, it can lend out USD 475 because it only needs to keep USD 25, or 5%, of the deposit. The bank has less money to lend out on each dollar deposited if the reserve ratio is raised.

Changing Consumer Attitudes

The Fed’s final instrument for influencing markets was its influence over market perceptions. Given the transparency of our economy, this strategy is more challenging because it relies on influencing investors’ opinions. Practically speaking, this includes any economic announcement made public by the Fed.

The Fed could say that the economy is growing too fast and that inflation is a concern. If the Fed is telling the truth, an increase in interest rates is logically on the horizon to slow the economy. If the market agrees with what the Fed says, people who own bonds will sell them before interest rates increase and they lose money. Bond prices would decline as investors dumped their holdings, and interest rates would rise. This would allow the Fed to raise interest rates to slow the economy without taking action.

On paper, this looks fantastic, but it’s a little more challenging in practice. This method holds water in terms of impacting the economy because, if you observe the bond markets, they move in unison with the Fed’s instructions.

Term Securities Lending Facility and Term Auction Facility

The credit markets, which significantly impacted the economy, presented challenges to the Fed in 2007 and 2008. Investors have now received an unexpected and acute reminder of the possible risks associated with taking on credit risk due to the recent hikes in interest rates and the subsequent collapse in the value of subprime-backed collateralized debt obligations (CDOs).

Although the underlying cash flows of the majority of credit-based investments did not significantly erode, investors started to demand higher return premiums for holding these investments, which not only increased interest rates for borrowers but also restricted the total amount of money that financial institutions were willing to lend, which in turn put pressure on the credit markets.

Given how bad the crisis was, the Fed had to devise new ways to lessen its effects on the economy as a whole. The Fed supported credit markets, investors’ perceptions of them, and institutions’ willingness to lend despite deteriorating economic and credit market conditions. The Fed established the term “auction” and “securities lending facilities” to achieve this. Let’s examine these two things in detail.

Term Auction Center

The term auction facility was created to give financial organisations anonymous access to Federal Reserve funds to help with short-term liquidity needs and generate capital for lending.

Because businesses would bid on the interest rate they would pay to borrow money, it was given the name auction. This contrasts with the concession window, which makes an institution’s need for funds known to the public, causing depositors to worry about the institution’s viability, which only serves to heighten worries about the stability of the economy.

Lending Facility for Term Securities

The Fed established the term securities lending facility as an additional option to address balance sheet concerns, enabling banks to exchange mortgage-backed CDOs for U.S. Treasury securities. Because of the high exposure that the firms had to mortgage-backed CDOs, the value of their assets was declining. This had profound implications for their balance sheets. If uncontrolled, falling CDO prices might have caused financial institutions to go bankrupt and contributed to losing faith in the American financial system.

Balance sheet worries, however, may be lessened until liquidity and pricing circumstances for these securities improve by replacing falling CDOs with U.S. Treasuries. This recently developed technique allowed for the 2007 Fed-planned seizure of Bear Stearns.

Monetary Easing

The Fed’s arsenal of tools may occasionally need to be improved to boost economic activity during a severe crisis. For example, quantitative easing (QE) is an unconventional monetary policy where a central bank buys longer-term government securities or other kinds of protection on the open market to expand the money supply and promote lending and investment. By driving up the price of fixed-income assets, purchasing these securities boosts the economy’s money supply and lowers interest rates. As a result, the central bank’s balance sheet also significantly increased.

Normal open market operations, which target interest rates, are ineffective when short-term interest rates are at or near zero. Thus, a central bank can instead target specific asset purchases. In addition, quantitative easing expands the money supply by acquiring assets with freshly issued bank reserves to give banks more liquidity.

Some central banks have turned to even more severe measures like hostile interest rate policy if QE fails (NIRP). Although it was adjusted to 0%-0.25% after the 2008 financial crisis and once more in March 2020 in the wake of the COVID-19 pandemic, the Fed has never before placed target interest rates below zero.

Even though monetary policy is generally in flux, it relies on the fundamental idea of changing interest rates, which affects the money supply, the economy, and inflation—understanding the Fed’s motivations for implementing particular policies and how those policies might affect the economy. This is so that opportunities presented by the ups and downs of economic cycles can be taken advantage of to accept or shun investment risk. As a result, finding attractive chances in the markets requires a solid understanding of monetary policy.

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Larry Summers said, “We have a long way to go to get inflation down” before reaching the Fed’s goal inflation rate, adding that “I suspect [Fed policymakers are] going to need more increases in interest rates than the market is now judging or than they’re now saying.”

He emphasized that “6 [percent] is certainly a scenario we can write,” underlining “that tells me that 5 is not a good best guess.” Traders anticipate the Fed will increase rates to approximately 5% by May.

Larry Summers’ comment came soon after the publication of the United States Monthly Jobs’ Report, which showed an increase in average hourly earnings.

Larry Summers said, “Looking at wages is, in my opinion, the finest single indicator of core underlying inflation. So I think inflation will be a little more persistent than what many are anticipating.”

Even if the Fed’s tightening effort has had a minimal influence on several United States indices, Larry Summers cautioned that change typically happens abruptly.

Larry Summers also cited the housing market, highlighting that “at a certain point, you see credit drying up,” posing challenges with repayment. When prices decline, it meets with a rapid rush of people eager to sell their properties.

“Once you get into a negative situation, there’s an avalanche aspect — and I think we have a real risk that that’s going to happen at some point. I don’t know when [the downturn is] going to come, but when it kicks in, I suspect it’ll be fairly forceful,” he added.

“This recession is going to be a relatively high-interest-rate recession, not like the low-interest-rate recessions we’ve seen in the past,” the former Treasury secretary remarked, while commenting on the way ahead for the country.

Photo credit: Wikimedia Commons

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According to Michele Raneri, vice president of US research and consulting at TransUnion, “However, as long as employment numbers remain strong, there should continue to be a steady flow of customers seeking access to new credit products, credit cards and personal loans in particular, and concurrently, an ample supply of lenders willing to offer credit to them.”

Due to the continued strength of the US employment market, more consumers are being given access to new credit and financing options. The economy added 261,000 jobs in October, and hourly wages grew 4.7% over the same month last year.

According to TransUnion’s Quarterly Credit Industry Insights (CIIR) report, credit card balances reached USD 866 billion in the third quarter, a 19% increase over the same quarter in 2021.

Furthermore, credit card balances surged 72% and 32% among Gen Z and Millennial borrowers, respectively. In addition, private-label credit card balances, also known as store-branded cards, increased by 7% to $122.1 billion.

The overall value of all personal loans increased to USD 210 billion, up 34% from the third quarter of 2021. In addition, lending to borrowers with subprime credit increased, significantly contributing to that expansion. As a result, personal loans increased from 21.6 million in the second quarter to 26.4 million overall.

Delinquencies for most credit products were comparable to those before the pandemic, although they have increased over the past year, especially for subprime borrowers.

Inflation & Rising Rates
Rising costs of housing, food, and gasoline are tightening consumer budgets. As a result, consumer prices grew 7.7% year-over-year in October, down from 8.2% in September but above the Fed’s 2% objective.

The Fed has raised its benchmark interest rate to combat excessive inflation. In November, it hiked its benchmark rate by 0.75 percentage points to a range of 3.75 to 4%.

When the Fed’s rate rises, credit card and personal loan rates follow suit. This implies consumers’ financing costs are growing, causing financial distress.

Mortgage Trends
TransUnion data also showed that mortgage originations were down 47% in the second quarter of 2022 compared to the same period in 2021. TransUnion data needs to catch up on mortgage origination.

Rising home values have led to fewer mortgages and more home equity solutions. Second-quarter mortgage originations for home purchases fell 23% to 1.5 million while refinancing originations fell 74% to 425,000. New mortgages averaged USD 345,557, up from USD 305,140 last year. HELOCs and home equity loans grew 47% and 43% year-over-year.

Auto Loan Trends
A scarcity of new vehicles also reduced the number of new auto loans in the second quarter. As a result, originations were down 14.9% from a year ago and 4.1% from pre-pandemic Q2 2019.

Inflation and rising interest rates have affected the affordability of new and used car loans.

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Recently, the Fed also slashed its interest rates to nearly zero in order to curb the impact of the Covid-19 on its market. Most of the countries in the region act accordingly to the Fed because their currencies are pegged to the US dollar.

The Central Bank of Kuwait cut its discount rate by 100 basis points to 1.5 percent from 2.5 percent, setting the rate at its lowest level in history, the bank said in a statement. It also trimmed its overnight, one-week and one-month repo rates by 100 bps to 1 percent, 1.25 percent, and 1.75 percent respectively.

The Central Bank of the United Arab Emirates also announced its decision to cut interest rates interest rate on one-week certificates of deposit by 75 bps and other rates by 50 bps.

Central banks of other Gulf regions such as Qatar also cut their deposits, lending, and repo rates along with Kuwait and the UAE. Bahrain too followed suit by slashing its overnight, weekly and monthly deposit rates and lending rates.

The outbreak of the coronavirus, which originated in the Chinese city of Wuhan, has impacted markets all across the globe. In the Gulf region, the pandemic has bought the tourism and aviation sector to a standstill. So far, the aviation sector in the Middle East has suffered losses of around $100 million.

According to the International Air Transport Association (IATA), airlines in the Middle East are expected to suffer revenue losses of around $4.9 billion this year.

If the impact of the slowdown becomes more severe, we may see further rate cuts from the Gulf central banks in the future.

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As stated by IG, the FTSE 100 will be 16 points lower standing at 7,143, the CAC 40 is expected to open around 14 points lower at 5,258 and the DAX will possibly open 47 points lower at 12,359.

Although Wall Street had a bounce on Friday, it had a low close for the week. Dow Jones industrial average, S&P 500 Index and the Nasdaq were low by more than one percent.

As per the industrial speculations, there is possibility that on Wednesday the US central bank will increase interest rates to 1.75%, up from 1.5%. The Fed has also indicated that there will possibly be three more climbs in rate in the current year.

Representatives from Britain and Europe will hold a meeting in Brussels later this week to hold Brexit discussions prior to an EU summit.

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Nigel Green

March 16, 2017: The US Federal Reserve raised interest rates for the second time in three months on Wednesday. It was prompted to do so by strong jobs data, and forecasts that inflation is heading towards its target.

This rate rise by the world’s de facto central bank confirms that we’re in a new era of higher inflation and higher interest rates. Investors will now need to position themselves accordingly.

Rates are beginning to normalise. Whilst it may take a couple of years or so to get there, when they do, the global economy will look very different to how it does today.

With this shifting landscape, investors now need to ask themselves three key questions.

First, is my portfolio truly diversified? Having a well-diversified portfolio is one of the fundamentals of successful investing, but alarmingly, and for a myriad of reasons, many investors are simply not adequately diversified. This puts them at risk and means they are likely to miss out on opportunities.

Being truly diversified across asset classes, sectors and geographical areas, and not trying to be too smart with sector or regional bets, is perhaps more important than ever. The traditional interrelationship between sectors and regions has diminished since President Trump took office.  A lot will be riding on which way the greenback heads and, crucially, which policies are green-lit by Congress.

Second, am I prepared for dollar swings?  In the short term, higher Fed rates will attract overseas capital into the US, especially to those sectors, such as energy and financials that will most likely benefit from Trump’s policies. On the flip side, emerging markets will become less attractive because a strong dollar makes interest and repayment more costly in local currency.

However, the strength of the dollar might weaken again in the coming months.  The markets are pricing in three hikes in 2017 – I think it will be two, which would result in a fall back of the greenback later in the year.

And third, am I prepared for inflation? The American economy might not have a serious issue with inflation now, but we can be almost sure inflation is going to creep up on us.

Investors need to keep some powder dry in preparation for this time as their dollar-buying power will be hit when it finally arrives.

Investors who answer these questions honestly and then take affirmative action will find that they do not need to accept lower returns in this new era of higher rates and inflation.

Nigel Green is the founder and CEO of deVere Group

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February 24, 2017: Several Federal Reserve policymakers said it may raise interest rate ‘fairly soon’ should jobs and inflation data come in line with expectations. This is according to the minutes of the Fed’s meeting released on Wednesday.

“Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labour market and inflation was in line with or stronger than their current expectations,” the Fed said in the minutes.

Fed Chair Janet Yellen said it would be ‘unwise’ to wait for too long to raise the rates again. This gave a strong indication that the central bank remains on track to consider raising rates again by the summer.

Prices for US stocks fell marginally following the publication of the minutes and yields on US government debt also dropped. Expectations on when the Fed will next raise rates were little changed, with investors predicting a move in May at the earliest, according to fed fund futures data compiled by the CME Group.

Among voting members in general, there was much less urgency to raise rates with many seeing only a ‘modest risk’ that inflation would increase significantly and that the Fed would ‘likely have ample time’ to respond if price pressures emerged.

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The good performance has led to speculation of a further rate hike.

The Federal Reserve had raised interest rates in December. The hike was the second time interest rates were hiked since the 2007-2009 financial crisis.

“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.”

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 normalise rates faster than other central banks.

JP Morgan Chase & Co. Chief Executive Officer Jamie Dimon has predicted that interest rates will rise along with a growing US economy. “I believe America is doing better than people think and therefore interest rates are probably going to be stronger than people think,” Dimon told health investors and executives at the JP Morgan Healthcare Conference in San Francisco.

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