Predicting the Fed's Next Move
The Federal Reserve didn't pull out any surprises today when it blandly announced that it will keep interest rates near zero as the economy continues to recover. But even as the Fed remains fairly tight-lipped about when it will begin ratcheting up rates, economists have been quick to speculate about what's in store. Here are some predictions:
The general consensus is that the Fed could raise rates as
early as this summer. But to some, this view appears overly optimistic.
"The consensus view of what the Fed's likely to do makes absolutely no
The precise timing of the Fed's eventual increase, of course, depends on how a number of moving parts eventually fit together. The two most obvious questions are when the lending environment will improve and how long it will take for unemployment rates to come down. "Those are really the two tipping points for the Fed in my view: a sustained turn in the labor market and a recovery in bank lending. We'd have to see those two things before the Fed raises," says Darda.
Also thrown into the mix is the populist undertones that President
So what would it take for the Fed to hasten its timeline? "If we went from 10 to seven in a matter of months, I think that would be the kind of acceleration where people would say, 'We need to have a handle on this,'" says Tjornehoj, referring to the country's unemployment rate. "I don't think that's within the realm of likely possibilities."
One key question is: When the Fed decides to push up interest rates, how quickly will it move?
Tjornehoj predicts that the Fed will adopt gradual increases of a 25 basis points at a time. "I think the first indication will be changing from a range of zero to 25 to simply pegging it at 25. And then the next one would be 50," he says. "I think it's going to be a slow progression up to 1 percent."
Englund agrees. "We're assuming a quarter point a meeting, just because that's the Fed's historic norm and because we think they'll be walking on eggshells when they start the tightening process," he says. Still, he argues that a more compact timeline would be ideal. "The smart thing, I think, would be to get the rate to 2 to 3 percent as soon as possible," he says.
Predicting the Fed's Next Move
The Federal Reserve didn't pull out any surprises when it blandly announced that it will keep interest rates near zero as the economy continues to recover. But even as the Fed remains fairly tight-lipped about when it will begin ratcheting up rates, economists have been quick to speculate about what's in store. Here are some predictions
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Predicting the Fed's Next Move | Rob Silverblatt
(c) 2010 Rob Silverblatt