The U.S. Federal Open Market Committee meets next week to discuss policy and they will likely be debating the question posed in this blog headline. The potential of a policy mistake would seem to be rising. Tighten too soon and the Fed could push the U.S. towards another dip into recession. Wait too long (or be too loose with stimulus) and the seeds for future inflation could be sown broadly and deeply.
Many experts have said that while there is no concern about inflation in the next year or two, they expect the Fed to err in the direction of avoiding deflation, raising the prospect of higher inflation in the long term. This makes good sense to us, but time will tell.
The important thing to recognize is that the chances of a policy mistake and the ultimate effects of such a mistake on both the economy and the markets are on the rise.
