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Fed Leaves Rates Unchanged – Some Brief Thoughts

The Fed left interest rates unchanged at 0-0.25%.  Here’s the key part of the statement:

Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate.

As I said previously, there was really no sound argument for a rate hike at present. The risks outweighed the rewards.  Given the weakness in the US economy the argument for leaving rates lower for longer remained justified. So the potential positives were marginal, however, causing further turmoil in commodities, foreign currencies and emerging market economies could have posed a substantial downside risk which could have reverberated back to the US economy. Remember, the Federal Reserve is the most important Central Bank in the world.  And given that the US economy exists in a global economy the Fed has to be mindful of how its policies impact foreign economies.  The USA bears an exorbitant privilege via its reserve currency, but also bears an exorbitant global responsibility.

This was the right decision in my view.  So, Janet is off to a pretty good start here.  Although I still think she could benefit from being a bit more transparent in the future.  The uncertainty over this decision in the last few months was totally unnecessary….

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