Many economists believe the Federal Reserve risks making a big mistake if it sticks to its recent guidance about keeping interest rates super low for the next three years.
The Fed said last month that it expected to keep short-term interest rates near zero until at least late 2014 to bolster the slow recovery. Among 49 economists who participated in the latest monthly Wall Street Journal survey, the vast majority—33 respondents—said moving to raise rates then would be too late. Just three said it would be too soon, 11 said it would be right on time and two didn't answer.
Many said the central bank risks a higher rate of inflation if it didn't move sooner than indicated. "If the Fed waited that long it would be too late. I think the Fed will act before then," said Paul Kasriel, chief economist at Northern Trust.
The Fed has emphasized that it isn't hidebound to follow its statement. As the economic outlook shifts, it can move earlier or later. Low interest rates can help a weak economy by spurring borrowing to finance investment and spending. But if the economy strengthens sooner than the Fed expects, very low interest rates could cause it to overheat, fueling higher inflation.
The Fed issued its statement in late January, shortly before the government's strong employment report for the month. The Labor Department said employers added 243,000 jobs in January, and the unemployment rate fell to 8.3%. The Journal survey was conducted after the report was released.
While the encouraging jobs data on their own probably wouldn't significantly sway Fed officials, a stronger labor market over the next year could pressure them to move sooner to raise rates, economists said. Stirrings of willingness among banks to extend credit also could boost economic growth.
"The public needs to understand they should expect the Federal Reserve to change its mind. It's the nature of the beast," given how imprecise forecasting job growth can be, said Allen Sinai, chief global economist at Decision Economics Inc.
"I don't know why anybody believes the Fed's forecast," Northern Trust's Mr. Kasriel said. "They didn't see the biggest recession in the postwar era coming."
The economists surveyed generally forecast higher inflation and lower unemployment than the Fed over the next three years. The central bank sees inflation remaining at or below 2% through late 2014, based on its preferred Commerce Department measure. The average inflation forecast among private economists for 2014 was 2.6%, based on the widely followed consumer-price index produced by the Labor Department. The Fed foresees the unemployment rate between 6.7% and 7.6% by the end of 2014. The forecasters are at the low end of that range, with a 6.8% projection.
In part because of their more upbeat forecasts for employment, the economists also doubt that the Fed would take the additional step of launching a new bond-buying program to boost growth, something officials have made clear they are considering. Among the 49 economists, 30 said they didn't expect such a program, while 17 said they did and two didn't answer.
The Fed is likely to raise interest rates before the end of 2013, predicted Mr. Sinai, who expects the unemployment rate to drop to about 7.3% by then.
"Three years is an awfully long time for the Fed to be pledging to keep rates near zero," said Robert Dye, chief economist at Comerica Bank, who also noted that the central bank has given itself some "wiggle room" to adjust rates sooner if needed. "There is an advantage to the Fed being a bit vague," he said.
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