This is a concern we share as history is littered with examples of such policy errors well beyond just that seen during the Great Depression.
More recent examples include Japan’s premature tightening of fiscal policy under Hashimoto in 1997, the movement away from ZIRP under BoJ’s Hayami and Sweden’s tightening in July 2010.
On the latter we have seen the Riksbank forced into not only reversing the hikes but also subsequently adopting ZIRP last month.
A premature and ill-communicated shift in policy would lead to increased volatility, tighter financial conditions and threaten the recovery. Dudley worries about the latter saying that premature tightening would lead to aborted economic liftoff and harm the Fed’s credibility. This is not only an issue for the Fed but also the BoE.
We continue to believe that central banks more generally will not want to start hiking interest rates until they are certain that they can take rates back to their terminal/equilibrium level.
They want to have the ability to react to future shocks and not be forced into a corner and deliver a clutching-at-straws-type easing of policy. The BoJ, and to a certain extent the ECB, seem to be in a situation of delivering monetary policy action that is still struggling to gain traction.
The Fed and BoE will not hike next year unless they are confident they can take their respective policy rates to 3.75% for Fed Funds and 2.50% for Bank Rate.