From The Conversable Economist:Speaking on a panel titled "Monetary Policy Normalization: Graceful Exit or Bumpy Ride?" at the American Economic Association's annual meeting, Federal Reserve Bank of Boston President Eric Rosengren said that the economy has improved enough for the discussion to move from whether normalization will occur to when normalization will occur.
"I believe the continued very low core inflation and wage growth numbers provide ample justification for patience," Rosengren said. "A patient approach to policy is prudent until we can more confidently expect that inflation will return to the Fed's 2 percent target over the next several years. Such patience also provides support to labor markets."
"The timing of the initial tightening of short-term interest rates after a recession depends on several factors," Rosengren said. "Previous liftoffs can provide only an imperfect guide to likely future actions – but do provide some indication of factors that should be considered."...MORE
When Will the Federal Reserve Raise Interest Rates?
Before the Great Recession, the primary tool for the Federal Reserve to conduct monetary policy was by altering the federal funds interest rate. As the recession got underway, the Fed started cutting this interest rate in August 2007 and by December 2008, it was down to almost zero percent, where it has remained. As the figure shows, the Fed consistently reduced interest rates during periods of recession (the shaded areas), but the Great Recession was the only episode during this time period where the economic contraction was so severe that the rate was taken all the way to zero.
But the Great Recession ended in June 2009. The recovery, unpleasantly sluggish though it has been, has now been underway for more than five years. As we start 2015, an obvious question is when the Fed will raise interest rates. Eric Rosengren of the Federal Reserve Bank of Boston offers some insight about how the Fed is viewing this question based on comparing current economic conditions with the two previous times that the Fed acted to raise the federal funds interest rate in a substantial way: that is, the rises in February 1994 and in June 2004.
First, the November 2014 unemployment rate was 5.8%. In June 2004, the Fed tightened when the unemployment rate was 5.6%. In February 1994, the Fed tightened with the unemployment rate was 6.6%. Notice that in both cases, the Fed acted to raise interest rates at a time when the unemployment rate was still falling--not waiting until the unemployment rate had bottomed out....MUCH MORE
