## U.S. Monetary Policy: 3-2-1, Interest Rate Liftoff!

_IMF Blog, September 10, 2014_

## Source details

**Canonical URL:** [U.S. Monetary Policy: 3-2-1, Interest Rate Liftoff!](https://www.imf.org/en/blogs/articles/2014/09/10/u-s-monetary-policy-3-2-1-interest-rate-liftoff)

## Other formats

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## Bibliographic details
- Authors: Francesco Columba, Jarkko Turunen
- Published: September 10, 2014

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### Overview
- After more than five years of exceptionally low interest rates, liftoff of U.S. policy interest rates from close to zero is expected to take place by around mid-2015.
- Timing is not set in stone and will depend on the state of the U.S. economy; stronger data could move liftoff earlier, weaker data could delay it.
- Based on the authors' most recent economic projections, there is some scope for policy rates to stay at zero for a little while longer than mid-2015, given remaining labor market slack and still low inflation.

### Key factors determining liftoff timing
- Two main factors determine when the Fed will move policy onto the launchpad:
  - How much “labor market slack” there is in the economy.
  - The extent to which this slack translates into future wage and price inflation.

### Labor market slack (findings)
- Unemployment rate:
  - Stood at 6.1 percent in August.
  - Short-term unemployment is 4.2 percent and below its long-run average.
- Broader indicators of slack:
  - Almost 3 million Americans have been jobless for at least 27 weeks.
  - More than 7 million part-timers would like to work more.
  - Close to 2 million others have stopped looking for work.
- Adjustment horizon:
  - At current rates of job growth, it may take 3 or 4 more years for the economy to fully absorb these workers.

### Inflation and wage trends (findings)
- Fed’s preferred measure of inflation (personal consumption expenditure inflation) was 1.6 percent in July.
- This is still well below the Fed’s 2 percent target.
- There is little sign of a concerted increase in wage costs, particularly relative to productivity.

### Financial stability risks (findings)
- Keeping policy rates at zero increases the likelihood that financial markets get ahead of themselves and investors over-reach.
- Specific vulnerabilities:
  - Lower-rated corporate debt accounts for a bit less than a quarter of the corporate bond market; valuations appear stretched and issuance has been brisk.
  - Authorities are monitoring developments in the leveraged loan market and working to enhance supervisory guidance as underwriting standards deteriorate.
- Asset management flows:
  - Asset managers are increasingly investing in riskier and less liquid credit markets, raising the risk of a rush for the exits if expectations about Fed timing or pace change abruptly.
- Macroeconomic cost:
  - An abrupt reassessment of Fed liftoff timing or an unwinding of high risk tolerance could lead to a sudden re-pricing of assets with macroeconomic costs in the United States and abroad.

### Macroprudential policy recommendations (policy actions)
- Use macroprudential policies as the first line of defense against financial excesses while monetary policy remains committed to price stability and maximum employment.
- Examples of measures:
  - More demanding underwriting standards for banks that extend intermediate leveraged loans.
  - Tighter limits on large exposures to riskier assets.
  - Tougher prudential rules for regulated entities that hold riskier assets.
  - Actions to address the mismatch between liquidity promised to fund owners in good times and asset managers' ability to provide liquidity in stress.

### Communication and governance (policy guidance)
- Timing and communication are both critical for a successful liftoff.
- The Fed’s communications toolkit should continue to evolve to update markets and the public on the outlook and policy stance.
- Possible communication enhancements:
  - More frequent press conferences.
  - A regular monetary policy report that gives the Fed policymakers’ majority view on the outlook.
  - Providing clarity about the role of financial stability in monetary policy decisions.

### Conclusion (scenario outlook)
- Timing the liftoff is a difficult judgement and will depend on how well the U.S. economy performs in the next several months.
- While tangible risks to financial stability exist, the authors remain optimistic that a solid period of economic growth will facilitate a Fed interest rate lift-off.

*Francesco Columba, Jarkko Turunen — September 10, 2014 — U.S. Monetary Policy: 3-2-1, Interest Rate Liftoff!*

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## References

- [https://www.imf.org/wp-content/uploads/2014/09/newscom_capecanaveral-sipaphotosfour234459_532x797.jpg](https://www.imf.org/wp-content/uploads/2014/09/newscom_capecanaveral-sipaphotosfour234459_532x797.jpg)
- [economic projections](http://www.imf.org/external/pubs/cat/longres.aspx?sk=41777.0)
- [jobless](http://blogs.imf.org/2014/08/07/us-labor-force-where-have-all-the-workers-gone/)
- [https://www.imf.org/wp-content/uploads/2014/09/chart-1.jpg](https://www.imf.org/wp-content/uploads/2014/09/chart-1.jpg)
- [https://www.imf.org/wp-content/uploads/2014/09/chart-2.jpg](https://www.imf.org/wp-content/uploads/2014/09/chart-2.jpg)
- [https://www.imf.org/wp-content/uploads/2014/09/chart-3.jpg](https://www.imf.org/wp-content/uploads/2014/09/chart-3.jpg)
- [communications toolkit](http://www.imf.org/external/pubs/cat/longres.aspx?sk=41778.0)

_Source: https://www.imf.org/en/blogs/articles/2014/09/10/u-s-monetary-policy-3-2-1-interest-rate-liftoff_