Why did the Federal Reserve decide, last week, to leave interest rates unchanged? The answer is all the more relevant because three members of the Open Market Committee voted against the decision, which was not seen in two years. To find the answer you have to look at the way central bank authorities are reading the behavior of jobs and inflation, the two indicators constitutive of its dual mandate.
The statement issued at the conclusion of last week’s meeting recognized “the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year.” However, some mixed signals were also highlighted. For instance, job gains are judged solid, but the unemployment rate is little changed. Also, while household spending has been growing strongly, business investment has remained soft. Finally, inflation remains below the 2% objective. Therefore, the Committee concluded that the case for an increase in the federal funds rate “has strengthened,” but decided to wait for further evidence. Why?
The answer was provided by Federal Reserve Chairwoman Janet Yellen, during the press conference following the end of the meeting. She said, “the economy has a little more room to run…” because while the labor market is strong, inflation remains sluggish.
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