Economists: Fed Should Wait to Raise Interest Rates

The Federal Reserve Bank lowered short-term interest rates to zero in December 2008, and they have remained low for more than six years. Randall Kroszner, a Chicago Booth professor who served as a Fed Governor during that vote, noted recently, “The thought was that interest rates would have to stay down for an extended period…but we were thinking in terms of a short number of years, not five to ten.”

Since mid-2014, there has been much discussion about when the nation’s central bank would choose to raise rates and how that would affect economic recovery. This week, the IGM Economic Experts Panel considers the consequences of raising interest rates before inflation become obvious.

The Fed should wait until its preferred measure of inflation (Core PCE) is clearly rising—and not just forecast to rise—before it begins hiking interest rates.

Forty percent of the panelists agreed that the Fed should wait. “Go look at their forecasts for the last six years. Thank God they didn’t act based on those,” said Austan Goolsbee of Chicago Booth, agreeing. Some panelists shared Goolsbee’s skepticism of the bank’s forecasting, while others worried about the future of the world’s finances. “The recovery is anemic and I am more concerned that it will fizzle than I am worried about inflation. The Fed should not be too cautious,” said Harvard’s Oliver Hart, also agreeing.

Twenty-one percent of the panelists disagreed with the statement, placing greater faith in the predictive powers of the Fed. “As Gretzky said, ‘skate to where the puck will be,’” said Darrell Duffie of Stanford. “Inflation normally takes time to form, often two years or more. The Fed can judge timing.”

The ten percent of panelists who were uncertain expressed concerns about the bigger picture. “Other factors, such as unemployment and participation rates, should also enter the Fed’s decision,” explained Yale’s Larry Samuelson.

Of course, the decision lies with the leaders of the Fed. Yesterday, Minneapolis Fed President Narayana Kocherlakota made a case for keeping rates down until the second half of 2016. Fed Chair Janet Yellen has indicated she may want to raise rates sooner than that. But this isn’t a case where we can agree to disagree—the doves are many, but the hawks are circling.