Tags: Feldstein | Fed | rate | inflation

Feldstein: Fed Rate Hikes Likely to Come 'More Rapidly' Than Recent Forecasts

By    |   Wednesday, 01 Oct 2014 10:28 AM

Inflation is headed higher, and that likely means the Federal Reserve will raise interest rates more quickly and to a higher level than Fed officials have recently indicated, says Harvard economist Martin Feldstein, chairman of President Reagan's Council of Economic Advisers.

"I would not be surprised by a continued rise in the inflation rate in 2015," Feldstein writes in an article for Project Syndicate.

"In that case, the Fed is likely to raise the federal funds rate more rapidly and to a higher year-end [2015] level than its recent statements imply."

The median forecast of Fed officials is for a 1.375 percent fed funds rate at the end of next year, and they have suggested that the central bank will start raising rates in the second or third quarter of next year. The Fed's fed funds target now stands at zero to 0.25 percent.

"In my judgment, such rates would be too low. At a time when inflation is already close to 2 percent or higher, depending on how it is measured, the real federal funds rate would be at zero at the end of 2015," he argues.

"Instead of ensuring price stability, monetary policy would be feeding a further increase in the inflation rate."

The Fed's favored inflation gauge, the personal consumption expenditures price index, rose 1.5 percent in the 12 months through August. The Fed has an inflation target of 2 percent.

"If price stability were the Fed's only goal, the federal funds rate should now be close to 4 percent. The Fed's rationale for continuing its ultra-easy monetary policy is that its 'dual mandate' requires it to be concerned with employment as well," Feldstein explains.

"My own best guess is that the Fed will start to raise rates in March," he notes, adding that "the starting date is less important than the pace of the rate increase and where the rate will be" at the end of the year.

"Although it is possible to argue about the precise appropriate level of the fed funds rate, the Fed's own analysis points to a long-term rate of about 4 percent when the long-term inflation rate is 2 percent."

Meanwhile, Chicago Fed President Charles Evans tells CNBC that if it was up to him, he wouldn't raise rates before the second half of 2015.

"If you look at the risks, we ought to balance those and be concerned that sometimes coming out of zero [rates] . . . is really a difficult proposition for the economies. And so I'd like to be patient," Evans notes.

Evans isn't a voting member of the central bank's policymaking Federal Open Market Committee this year, but he will be next year.

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Inflation is headed higher, and that likely means the Federal Reserve will raise interest rates more quickly and to a higher level than Fed officials have recently indicated, says Harvard economist Martin Feldstein, chairman of President Reagan's Council of Economic Advisers.
Feldstein, Fed, rate, inflation
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2014-28-01
Wednesday, 01 Oct 2014 10:28 AM
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