BY MOST measures, America’s economy is flourishing. Unemployment is only 4.9%. From April to June payrolls swelled by a healthy 147,000 per month, on average. Consumer confidence is strong and sales of new homes are higher than at any time since 2008. Financial markets have mostly shaken off their early-year worries about Chinese growth and their summer blues over Brexit. Second-quarter growth, due to be revealed after The Economist went to press, was expected to rebound after an underwhelming start to 2016 (mirroring last year). Yet on July 27th, the Federal Reserve opted to hold interest rates in the target range of 0.25%-0.5% for the fifth consecutive meeting. What explains the central bank’s hesitation?

One answer is that inflation, according to the measure the Fed targets, is just 0.9%, well below the central bank’s 2% goal. But Janet Yellen, the head of the Fed, has long argued that price rises will pick up as the effect of cheap oil and a strong dollar dissipates. Core inflation, which excludes food and energy prices (and usually prefigures the headline measure), is 1.6%. And competition for workers...Continue reading