George, Esther

While I view the gradual approach as appropriate, postponing the removal of accommodation when the economy is near full employment and inflation is rising toward the 2 percent target could promote alternative risks that would decrease the likelihood of achieving our longer-run objectives. In the long run, a failure to keep interest rate policy in line with improving fundamentals can distort the allocation of capital toward less fruitful—or perhaps excessively risky—endeavors. Within the last two decades we have faced episodes of accelerating equity prices, housing prices and, most recently, commodity prices. Currently, commercial real estate markets, where prices have continued to drift higher, bear watching. When these types of imbalances tip, the entire economy can face the consequences of their fallout, with some sectors and populations more impacted than others. My concern for some time has been that extending monetary policy too far beyond its scope of capability risks undesirable financial, economic and
political distortions.

In the current environment, waiting to make additional adjustments to monetarypolicy may seem costless in the face of benign inflation pressures. Some argue that we have the ability to make more rapid adjustments later if inflation moves higher than currently projected. From a technical standpoint, it is true that the Fed has the ability to steer short-term rates and could raise them quickly if needed. But such actions are likely to be costly, inducing financial market volatility and slowing economic activity. Historically, rapid increases in interest rates end poorly, resulting in economic recessions.