Economists: Rising interest rates are the biggest threat to recovery

Fed Chair Janet Yellen (Robert Galbraith/Reuters)
Fed Chair Janet Yellen (Robert Galbraith/Reuters)

A survey released Monday morning by the National Association of Business Economists pointed to rising interest rates as the biggest potential threat to the nation's long-simmering economic recovery.

NABE represents economists working in industries ranging from manufacturing to business development. In its regular quarterly survey covering 48 economic forecasts, more than a quarter of respondents cited the prospect of higher interest rates as the most significant risk to more rapid growth. A substantial number -- about one-third of respondents -- expect the Federal Reserve will raise its target for short-term interest rates this year, despite recent statements by top officials that an increase is not expected until 2015. About half of the NABE panelists believed that timeline.

“Higher interest rates also appear to be in the cards," said Timothy Gill, deputy chief economist at the National Electrical Manufacturers Association and the leader of the survey.

The percentage of economists who think the Fed's first interest rate hike since before the recession could come sooner rather than later is striking, particularly because the poll was conducted before the central bank's meeting last week. Stock markets plunged over fears that Fed Chair Janet Yellen had suggested the possibility of raising rates during the first half of the year, rather than the second half, as most investors were expecting. Several influential Fed officials have since tried to reassure markets that the central bank has not changed its policy.

NABE President Jack Kleinhenz said his members' expectation for higher rates is a reflection of their optimism about the economy. Though GDP during the first quarter of this year is expected to clock in at a tepid 1.9 percent, the group predicts it will speed up to more than 3 percent by the end of the year -- faster than the Fed's own forecasts. A more rapid recovery could force the central bank's to respond more quickly.

Deciding when and how fast to move will be the biggest challenge facing the Fed over the next few years. Raising rates too fast could snuff out what has been a fragile recovery; moving too slowly risks allowing the economy to overheat, possibly sowing the seeds of the next crisis.

"A rise in rates does become a delicate balance going forward, and it is a double-edged sword.  While rate increases could undercut the recovery, they also can be viewed as a positive development for the economy," Kleinhenz said. "It is my view, and perhaps that of NABE's  forecasters, that the economy may be able to handle a more rapid rate adjustment toward a level consistent with more normal levels in the long term."

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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