White Paper No. 02, 2012

Next Hike End of 2014: FOMC Matches Historical Responses to Member’s Forecasts and Risks Repeating Earlier Mistakes

The Federal Reserve’s January 25, 2012 announcement that the next federal funds rate hike is anticipated for the end of 2014 is consistent with historical funds rate policy responses to FOMC members’ forecasts as documented in a simple, estimated rule-of-thumb. In principle, such consistency is a virtue in policy making, but there is a danger of repeating earlier mistakes. In particular, the FOMC risks giving too much weight to forecasts that proved unreliable in the past and underestimating the potential for sustained shifts in the natural employment rate.