It would be more damaging to raise interest rates too early than to raise them too late, the Federal Reserve’s second-highest-ranking official on monetary policy said Friday.
“I believe that the risks of lifting the federal funds rate off of the zero lower bound a bit early are higher than the risks of lifting off a bit late, ” Federal Reserve Bank of New York President William Dudley said at an event on monetary policy in New York City.
Dudley is the vice chairman of the Federal Open Market Committee, which is responsible for the Fed’s decisions relating to interest rates and the central bank’s balance sheet. The committee is led by Fed Chairwoman Janet Yellen.
The Fed has held short-term interest rates near zero since 2008 in an effort to stimulate the economy. Once it lowered interest rates all the way to zero and couldn’t lower them any more, it also began buying longer-term securities at a massive scale to provide stimulus.
With the unemployment rate dropping to near the level the Fed sees as healthy, though, the Fed is preparing to raise rates, a decision that would raise the cost of credit throughout the economy, affecting mortgages, business loans, credit cards and all other forms of debt.
The Federal Open Market Committee said in January that it would be “patient” in waiting to raise rates. Yellen said in congressional testimony that the Fed will soon change that guidance, and then a rate hike “could be warranted at any meeting” of the committee afterward.
Current bond market prices indicate that investors expect the first rate increase between June and September.
Speaking at the same conference, Federal Reserve Vice President Stanley Fischer said the Fed’s target “rate will be raised sometime this year,” but gave no further clues of the timing.
Friday’s conference was organized around a discussion of short-term interest rates and how they factor into economic models.
Federal Reserve Bank of Cleveland President Loretta Mester suggested that there might not be enough attention given to the possibility that the Fed could overheat stock and bond markets by keeping rates low for too long. She said that “our models aren’t well-enough developed to allow us to quantify the risks to financial stability of holding rates at zero for a long time, yet the crisis showed us that financial instability comes with a very high cost.”
