As the Federal Reserve prepares to raise interest rates for thefirst time since 2006, almost all the talk of a potential policymisstep has centered on the peril of hiking too soon.

The bigger concern is that the Fed may wait too long, say ThomasLam at RHB Securities Singapore Pte. Ltd and David Glocke atVanguard Group Inc. A decision to keep the overnight rate near zeroon Sept. 17 may wind up jolting debt markets more than actuallyraising it, said Lam, who according to Bloomberg was thefourth-most-accurate forecaster of the U.S. economy lastquarter.

The worry is that by holding its target at crisis-period levelstoo long, the Fed may fail to get ahead of a strengthening economy.That would push up yields as traders anticipate that policy makerswill have to adopt a more aggressive approach to lifting interestrates than the gradual path Fed Chairman Janet Yellen hasstressed.

“They may get behind the curve on the economy and possibly onfinancial stability and lose credibility in the markets with beingable to follow a gradual rate path higher,” Lam said fromSingapore. “That means you are going to be affecting the wholerange of rates down the road, and the economy is more affected bylonger-term rates.”

The Federal Open Market Committee (FOMC) has held its target ina range of zero to 0.25 percent since December 2008 to support theeconomy. Fed funds futures show traders see a 28 percent chance ofan increase this week, down from 48 percent a month ago, accordingto data compiled by Bloomberg. The calculation is based on theassumption that the effective fed funds rate will average 0.375percent after the first increase.

The probability has declined along with signs of a slowdown inChina and last month's rout in global stocks. Fed officials arebalancing the recent market turmoil with signs of a strengtheningU.S. economy: The nation's jobless rate fell to 5.1 percent inAugust, the lowest since April 2008.

Gradual Rate Increase Likely

“If the Fed waits too long, all of a sudden it is going to catchup to them one day and they are going to have to go faster,” saidGlocke at Valley Forge, Pennsylvania-based Vanguard, which manages$3.4 trillion. “I'd rather see them get the ball rolling. Start usoff and give us a nice dovish statement afterwards.”

Interest-rate markets are signaling that even with the lack ofconsensus on when the tightening will begin, most investors arebuying into the Fed's gradual message.

Forwards imply that 10-year Treasury yields, now at about 2.25percent, will stay below 3 percent for the next half-decade.Money-market derivative traders see the funds rate sill below 1percent by the end of next year.

Fed Vice Chairman Stanley Fischer last year, before taking hiscurrent position, offered remarks that could lend support for thoseexpecting a rate boost this week. The situation is always unclearand monetary policy takes time to affect the economy, he said atthe time.

“It's not feasible for the FOMC to get the timing of the startabsolutely right,” said Lam, who predicts the Fed will lift ratesthis week.

“But ultimately the Fed should avoid the cost of potentiallysurprising on the path, by surprising on the timing now,” he said.“That's the least costly option.”

–With assistance from Rich Miller in Washington and Paul Cox inNew York.

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.