The cost of raising interest rates too soon is much higher than raising them too late. Remember the Fed's vow of patience?:
The Not-So-Bad Economy, by Paul Krugman, Commentary, NY Times: ...unemployment has been cut in half, and the Federal Reserve is getting ready to raise interest rate...
I believe that the Fed is making a mistake. But the fact that hiking rates is even halfway defensible is a sign that the U.S. economy isn’t doing too badly. So what did we do right?
The answer, basically, is that the Fed and the White House have mostly worried about the right things. (Congress, not so much.) Their actions fell far short of what should have been done; unemployment should have come down much faster... But at least they avoided taking destructive steps to fight phantoms. ...
Meanwhile, on the other side of the Atlantic, the European Central Bank gave in to inflation panic, raising interest rates twice in 2011 — and in so doing helped push the euro area into a double-dip recession.
What about the White House? Some of us warned ... that the 2009 stimulus was too small..., a warning vindicated by events. But it was much better than nothing, and was enacted over scorched-earth opposition from Republicans...
Unfortunately, the U.S. ended up doing a fair bit of austerity too, partly driven by conservative state governments, partly imposed by Republicans in Congress via blackmail over the federal debt ceiling. But the Obama administration at least tried to limit the damage.
The result of these not-so-bad policies is today’s not-so-bad economy. ... Still, things could be worse. And they may indeed get worse, which is why the Fed’s likely rate hike will be a mistake.
Fed officials believe that the solid job growth of the past couple of years ... will continue even if rates go up..., those officials could be right, in which case waiting to raise rates could mean some acceleration of inflation.
On the other hand, they could be wrong, in which case a rate hike could end the run of good economic news. And this would be much more serious than a modest uptick in inflation, because it’s not at all clear what the Fed could do to fix its mistake.
I’m not sure why this argument, which a number of economists are making, isn’t getting much traction at the Fed. I suspect, however, that officials have been worn down by incessant criticism of their policies, and want to throw the critics a bone.
But those critics have been wrong every step of the way. Why start taking them seriously now?