US plans first rate rise since 2008

The Federal Reserve is poised to increase its official cash rate for the first time in almost seven years.

American interest rates have remained at a record-low 0.25 per cent since December 2008, but Federal Reserve chair Janet Yellen has now said they will probably rise sometime this year.

Ms Yellen said in a speech that the time is coming to “normalise” interest rates as the economy strengthens and inflation climbs towards the Fed’s two per cent target.

“Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy,” she said.

“For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalising monetary policy.”

However, Ms Yellen added that the Fed would only raise rates if it saw continued improvement in the job market and was reasonably confident that inflation would keep rising.

Ms Yellen said “the pace of normalisation is likely to be gradual” once rates start climbing, due to continued weaknesses in the economy.

“If conditions develop as my colleagues and I expect, then the Federal Open Market Committee’s objectives of maximum employment and price stability would best be achieved by proceeding cautiously, which I expect would mean that it will be several years before the federal funds rate would be back to its normal, longer-run level,” she said.

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