Changes in monetary policy take time to work their way into the economy. Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road—either too much inflation, financial instability, or both. In that scenario, we could be forced to raise interest rates rapidly, which in turn could push the economy into a new recession.
The factors I have just discussed are the usual sort that central bankers consider as economies move through a recovery. But a longer-term trend—slow productivity growth—helps explain why we don’t think dramatic interest rate increases are required to move our federal funds rate target back to neutral.