As Economic Performance Advances, the Fed Lags Behind

Moving into 2015, the U.S. economy is fundamentally sound. Key factors suggest that the economy is shifting gears toward sustained stronger growth, and that the supply-side nature of the lower oil prices will provide a big boost to economic performance in 2015. But the Federal Reserve’s monetary policy is wildly inconsistent with healthy economic growth. The Fed’s latest forward guidance that it can be “patient” in hiking rates—a nuanced change from its earlier “considerable time” language–misses the broader point that interest rates not only should be higher, but that economic performance will benefit and be better balanced when the Fed normalizes monetary policy. This suggests that the Fed should begin to hike rates sooner rather than later.