Fed Chairman Ben Bernanke is right to be worried about a false dawn for the U.S. economy, Randall S. Kroszner, a former governor of the Federal Reserve told CNBC in Singapore on Friday.
Earlier this week, Bernanke told CNBC the economy remained challenging despite signs of improvement, and the rise in Treasurys yields.
"I would agree with Chairman Bernanke that we don't want to start popping the champagne corks yet," said Kroszner, who's now Professor of Economics at the University of Chicago's Booth School of Business.
"We've seen some very important false dawns in the U.S. labor market....In early 2011, we started to see very strong job creation, more than 200,000 a month, for three months, then things fell again.”
Kroszner, who served as a member of the Federal Reserve Board between March 2006 and January 2009, said the central bank needs to see a couple of more months of positive data before it can be confident of the recovery.
One potential problem facing the Fed is that investors no longer believe that rates will remain unchanged for the next few years. According to Kroszner, the Fed is trying to forecast the economy too far out in the future, when the "crystal ball gets really cloudy."
He cited the Fed’s decision in January to keep rates at exceptionally low levels until at least late 2014. Yields on Treasurys haven't fallen in response. In fact, the reverse happened last week: the unconvinced markets, faced with improving economic data and the prospect of higher inflation, drove 10-year Treasury yields to around 2.4 percent, though yields have fallen in recent days. It didn’t help that a number of Fed officials have also been warning that rates may have to rise earlier.
Kroszner said the Fed had more success in guiding the market last summer, when the forecast for rates was over a shorter time period.
"They achieved a lot over the summertime when they said they were going to hold interest rates low until mid-2013, markets moved exactly there. When you try to put the horizon out that long until late 2014, three years, it's a little bit tougher."