The Fed Can’t Drive Right Without Brakes

When asked why they’re gradually removing monetary stimulus even though inflation remains too low, Federal Reserve officials tend to offer the same refrain: If they don’t start moving now, they could eventually be forced to raise rates more sharply when the economy overheats. This fear of raising rates rapidly is a relatively recent phenomenon -- and it’s a key drag on the overall U.S. economy.

The Fed hasn’t always been so afraid to raise rates sharply. Over the course of nine monetary policy meetings, from February 1994 to February 1995, the central bank increased its short-term interest-rate target by a half percentage point at three meetings and by 0.75 percentage point at a fourth. Since then, however, it has raised rates by more than a quarter percentage point only once (in 2000), opting to act as gradually and predictably as possible.