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Janet Yellen and the Fed Did the Right Thing

By John Cassidy, New Yorker - September 18, 2015

As most people in the financial markets had been expecting, and as many commentators—myself included—had been urging, Janet Yellen and her colleagues at the Federal Reserve have decided not to raise interest rates, at least for now. Citing developments in the world economy, including recent turbulence in the stock markets and softness in inflation, Yellen told reporters, at the conclusion of a two-day Fed policy meeting, that the U.S. central bank wanted to wait a bit and see what impact, if any, the global developments will have on the U.S. economy.

The Fed’s decision was perfectly justified. As it interprets its legal mandate, its job is to maximize employment growth in a manner consistent with an inflation target of two per cent. Despite the fact that job growth has been steady and the unemployment rate has fallen to 5.1 per cent, which is close to the level at which the Fed believes inflation starts to accelerate, there is absolutely no sign yet of inflation picking up. To the contrary, headline inflation is running at an annual rate of just 0.2 per cent, and last month consumer prices actually fell a little. Core inflation, which excludes volatile food and energy prices, is running at 1.8 per cent, which is also below the Fed’s target. Even if you’re an inflation hawk, it’s hard to argue that the Fed needs to act now.

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