The Federal Reserve is potentially limiting its ability to deal with a future economic downturn by taking “baby steps” to raise interest rates, the chief U.S. economist at UBS said Thursday.
“You need in good times to build up a reserve of basis points so that when bad times come you can ease again,” Maury Harris said on CNBC’s “Squawk Box.” “If they’re going to be in such [slow-motion] when they tighten, heaven help us when there’s a real problem and they need to cut rates and they don’t have much left.”
The central bank’s Federal Open Market Committee said Wednesday it was unlikely at its April meeting to begin increasing its near-zero percent federal funds rate, the interest charged for short-term lending among financial institutions.
It also removed the closely watched world “patient” from the statement, indicating that a rate hike is closer. However, Fed Chair Janet Yellen told reporters following the FOMC meeting, “just because we removed the word ‘patient’ does not mean we will become impatient.”
That decision marked a compromise among FOMC members and a bid to shore up the central bank’s credibility, Harris said. Yellen’s recent comments suggesting a moderate pace of interest rate hikes was inconsistent with some FOMC members’ forecasts, he added.
“This makes her rhetoric more credible because they brought their own fed funds rate forecast back down to what indeed would be a very moderate pace of tightening,” he said.
