Today’s decision by the Federal Reserve to keep interest rates unchanged was the right one. There is no sign in the economic data that a durable acceleration in inflationary pressures is brewing and needs to be stopped by the Fed beginning to slow the economy. On the contrary, the still-damaged labor market continues to be an important drag on overall price growth, keeping the economy from reaching the 2 percent price inflation target set by the Fed. Finally, it is important that the Fed allow not only a return to target levels of wage growth and price inflation, but a period of above-target wage and price inflation. If they do not do this, they will convince households and financial markets that their inflation target is a hard ceiling, not a long-run average. This will make fighting future recessions much harder, and will solidify today’s still sub-par economic performance as the “new normal.” We don’t need to settle for that, and today’s decision to forego another rate increase is an encouraging sign in this regard.
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