Uh-Oh: The fed has a major credibility problem coming up

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We recently highlighted the concerns of economist Karl Smith, who stated that the chief threat to the economy was not gas prices, but rather a Fed unwilling to hold rates low in the face of an improving economy.

One difficulty in holding rates low: The whole world starts to second guess you, and talk about how you’re falling “behind the curve” when it comes to inflation.

And that seems to be happening.

A new survey from CNBC shows investors don’t believe rates will be held low through 2014, and a substantial portion believe the Fed has ALREADY fallen behind the curve.

The March CNBC Fed Survey, however, finds that nine out of 10 market participants don’t believe the Fed will wait that long.  In fact, 54 percent believe the first Fed interest rate hike will come by 2013.

“There is no way the Fed will fulfill its pledge of keeping rates at present levels until 2014,’’ wrote Rob Morgan of Fulcrum Securities in response to the survey. “I’m shocked that some market watchers are still talking about another round of quantitative easing…The big risk for the Fed is falling behind the inflation curve.”

More than half of respondents think Fed policy is “too accommodative,” a sizable jump from the January survey when just 37 percent thought the U.S. central bank’s policy was too easy.

That’s kind of wild.

Unemployment is 8.3%, and core inflation only grew by 0.1% last month, which is below the Fed’s target, and yet… more than half of respondents think the Fed is too loose.

If things get a little hotter both on the employment and inflation fronts, the pressure on the Fed to tighten prematurely is going to be intense.

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