On its own, therefore, the balance of probabilities argues against a rise. But the clinching argument against the hawks is that they ignore a fundamental asymmetry of risks. If the Fed waits too long to tighten, then inflation will rise above 2%. Were that to happen, the Fed has unlimited capacity to raise rates and could do so safe in the knowledge that it had pushed the American economy to its speed limit. If rates then had to rise steeply, the central bank would at least have more room to respond to future troubles by cutting again.This fear of "asymmetric risks" is what has created the reality of asymmetric policy: years of global ZIRP, flirting with NIRP, and trillions of dollars created out of thin air. If non-zero interest rates do eventually create a crisis, it won't be the fault of the increase, but of the central planners who distorted the economy and created massive imbalances by forcing rates to zero for so long.
Raising rates too soon would be much costlier. A slowdown in growth could turn low inflation into deflation. To perk the economy back up, the Fed would have little option but to restart quantitative easing. That sort of backtracking is precisely the fate that has befallen other central banks which moved to tighten too swiftly (see article). Years of rock-bottom interest rates in Japan might have been avoided had the Bank of Japan been a little more patient in 2000, when it lifted rates in response to quickening growth (and higher stockmarkets) despite falling prices.
Low interest rates have risks. But premature rate increases can make them a near-permanent feature of economic life. For months Fed statements have declared that inflation will soon return to 2%. There is little harm in waiting to be sure.
And here's Wall Street mag Barron's pleading for more of the same.
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