But a smooth path upward in the federal funds rate will almost certainly not be realized, because, inevitably, the economy will encounter shocks – shocks like the unexpected decline in the price of oil, or geopolitical developments that may have major budgetary and confidence implications, or a burst of greater productivity growth, as the Fed dealt with in the mid-1990s.
When shocks happen, as they do, policymakers will have to respond to at least some of them. Accordingly there is considerable uncertainty about the level of future interest rates – a degree of uncertainty that can be estimated statistically, and that should be taken into account by market participants and recognized by the FOMC when it discusses future levels of interest rates.