CAMBRIDGE – The US Federal Reserve has emphasized that its monetary policy will be determined by what economic indicators show. But it would require some extremely unlikely data to change the Fed’s implicit plan to end its purchases of long-term assets (so-called quantitative easing) in October 2014 and to start raising the federal funds rate from its current near-zero level sometime in the first half of 2015.
The financial markets are obsessed with anticipating whether rates will rise in March or June. Although my own best guess is that the Fed will start to raise rates in March, the starting date is less important than the pace of the rate increase and where the rate will be by the end of 2015.
There is a substantial range of views among the members of the rate-setting Federal Open Market Committee. The midpoint of the opinions recorded at most recent FOMC meeting implies a federal funds rate of 1.25-1.5% at the end of 2015. Even by the end of 2016, the midpoint of the range is less than 3%.
In my judgment, such rates would be too low. At a time when inflation is already close to 2% or higher, depending on how it is measured, the real federal funds rate would be at zero at the end of 2015. Instead of ensuring price stability, monetary policy would be feeding a further increase in the inflation rate.