Economists survey: What’s the Fed forgetting?

Dean Baker

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In the fourth quarter 2014 Bankrate Economic Indicator survey of leading economists, we asked: What unintended consequences are you most worried about from current or recent Federal Reserve policies?

What they said:

The end of QE (“quantitative easing,” the Fed’s economic stimulus of bond buying) could have a larger-than-expected impact on interest rates, which could dampen demand. This will be a bigger problem if members of the Federal Open Market Committee (the Fed’s policymaking panel) indicate they are concerned about inflation and are prepared to raise rates.

— Dean Baker, co-director, Center for Economic and Policy Research

Scott Brown

(I’m) not worried.

— Scott Brown, chief economist, Raymond James

Seth Harris

The economy remains fragile, and external factors have been slowing our growth in unpredictable ways (for example, Europe’s near-deflation and China’s slowed growth). Raising rates when there is uncertainty could slow the economy significantly and weaken jobs growth.

— Seth Harris, Distinguished Scholar, Cornell University Industrial & Labor Relations School

Alan MacEachin

The Fed’s aggressive QE and monetary policies have allowed corporations to borrow cheaply and use the funds to repurchase stock. This has been a significant factor in the extensive rise in stock values, perhaps creating a stock bubble. Unwinding these policies could lead to a correction in the equity markets sufficient to stall the current U.S. economic expansion.

— Alan MacEachin, corporate economist, Navy Federal Credit Union

Joel Naroff

Fed lags and improving economic conditions of both businesses and households could lead to greater lending and growth than expected. This could trigger inflation that accelerates at a higher-than-expected pace.

— Joel Naroff, president, Naroff Economic Advisors

David Nice

(My fear is of) major distortions in the bond market and in aggregate savings.

— David Nice, economist, Mesirow Financial

Jim O'Sullivan

Inflation will have a gradual but persistent upward bias by the time policy is back to neutral.

— Jim O’Sullivan, chief U.S. economist, High Frequency Economics

Lindsey Piegza

Ballooning federal debt could force the Fed to maintain low rates indefinitely, translating into years more of lackluster growth.

— Lindsey Piegza, chief economist, Sterne Agee

William Poole

At some point, perhaps late 2016, the Fed will be forced by rising inflation to start selling bonds.

— William Poole, former president, Federal Reserve Bank of St. Louis, and senior fellow, Cato Institute

Lynn Reaser

The Federal Reserve’s aggressive purchase of bonds has encouraged investors to assume more risk and has inflated prices across many assets. A faster path of interest rate increases than expected later next year or in 2016 could pummel various parts of the financial markets, including stocks.

— Lynn Reaser, chief economist, Point Loma Nazarene University

Jeffrey Rosen

(My fear is) rate shock if the Fed decides to sell its Treasury holdings.

— Jeffrey Rosen, chief economist,

John Silvia

There’s a risk of a policy mistake (tightening too early, in this case), leading to an overall downturn, but we believe conditions are strong enough to move forward with rate hikes.

— John Silvia, chief economist, Wells Fargo

Sean Snaith

The only area of the economy that may have been overstimulated by Fed policy is financial asset values. When the Fed gets closer to raising interest rates, there could be greater volatility and a potentially sizable correction in the stock market.

— Sean Snaith, director, University of Central Florida Institute for Economic Competitiveness

Phillip Swagel

(I’m concerned) that the Fed will get behind the curve and wait too long to raise rates, then hike quickly and cause asset market disruptions. We’ll know in the spring of 2015 whether the Fed has reacted to continued economic strength through the winter.

— Phillip Swagel, professor of international economic policy, University of Maryland School of Public Policy

David Wyss

(My fear is) inflation — but not for a couple of years. Congress may act to constrain the Fed, including, perhaps, making it hard to exit from its current stockpile of assets.

— David Wyss, adjunct professor of economics, Brown University

Lawrence Yun

A reversal in oil prices to higher ground and continuing rent increases could push up long-term interest rates, independent of the Fed policy. Another concern is the general weakness in the global economy, which will hamper U.S. exports.

— Lawrence Yun, chief economist, National Association of Realtors

Mark Zandi

Poor communication causes excessive financial market volatility, weighing on business investment and consumer confidence. This will be a concern until rates are hiked mid-2015.

— Mark Zandi, chief economist, Moody’s Analytics

Michael Fratantoni

(My concern is) near to medium rate volatility as the Fed stops its purchases of mortgage-backed securities, and as expectations increase for an exit-strategy communication to unwind the balance sheet holdings.

— Michael Fratantoni, chief economist, Mortgage Bankers Association

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