When is the Federal Reserve going to raise interest rates? Apparently, no one knows, not even the central bank itself.
That's because the Fed's baseline assessments of optimum levels of economic growth have continuously changed, according to former Fed chairman Ben Bernanke, who left in 2014. Because the targets are moving constantly, hitting them is nearly impossible.
Global uncertainty, from slowing growth in China to sovereign-debt issues in Europe, and mixed economic data have been among the key reasons for the shifts. Adding to the pressure for Fed policymakers evaluating the economic outlook correctly is the importance of timing rate hikes to avoid a recession, Ryan Sweet, Moody's Analytics director of real-time economics, said in a phone interview.
"If they wait too long and they had to tighten monetary policy aggressively, that's how they could trigger a recession," Sweet said. "If the economy is operating beyond full employment, so we have a very low unemployment rate, that risks the economy overheating and I think the Fed would be forced to raise rates fairly aggressively."
Based on the Federal Open Market Committee's long-run projections this year, the ideal economic scenario for the U.S. -- one that avoids both inflation and deflation -- includes gross domestic product growth of between 1.8% and 2; an unemployment rate between 4.7% and 5% and a benchmark federal funds interest rate of 3%.
But as Bernanke highlighted, those assessments have been continually reduced over the past 5 years.
While San Francisco Fed President John Williams believes the Fed should raise interest rates this year, he acknowledged the validity of the central bank's concern about global economic issues in an interview with the Washington Post.
