The Case Against Further Delay

Economic data suggest that an increase in the Fed’s target interest rate from near zero is warranted sooner rather than later. With nominal short-term interest rates close to zero and inflation of at least one percent, real interest rates have been negative for the better part of the past six years. But with rising growth in personal consumption and income over the past couple of years, negative real rates are unlikely to remain appropriate. The unemployment rate has declined nearly to pre-recession levels, and research suggests that there is little if any excessive slack in the labor market. Consistent with the Fed’s forward guidance, many labor market indicators support the case for an increase in interest rates. Inflation has been below the Fed’s 2 percent target since early 2012, but has been running slightly above target over the past half year. Because inflation is a lagging indicator, maintaining low interest rates poses serious risks. Recent financial market volatility is unlikely to affect economic fundamentals in the United States and thus has limited implications for monetary policy.