Liftoff is likely in the middle of next year, and rates should rise about one percentage point a year, according to an economist with the Federal Reserve Bank of San Francisco.
With federal funds rates near zero, the often used futures or forward rates are ineffective in calculating the future path of short-term interest rates. "These reflect average future rates, which in this situation can differ substantially from the more relevant modal or most likely future rates," economist Michael Bauer of the San Francisco Fed's economic research department said in an
"Option-based estimates of the most likely policy path indicate that market participants expect liftoff to occur around the middle of 2015, and further expect the subsequent policy tightening to be gradual," he wrote. He explained the gradual increase as "a pace of about 1 percentage point per year."
