Recently both the Federal Reserve and the Bank of Canada made smart decisions not to increase rates despite pressure from some less well informed quarters that they should do so as believers in the NAIRU rate are still convinced that inflation will rear its head now that unemployment is 4 .2% in the US and approaching 6% in Canada. But the most recent inflation rate on all items excluding food and gasoline prices which were affected by hurricane disruptions shows no sign yet of approaching their targeted inflation rate of 2 %. The US rate was a mere 1.3 % and the Canadian rate was also below the 2 % target.
The Canadian Finance Minister Bill Morneau also delivered an upbeat fall economic statement that celebrated the fact that growth continued to be moderately strong, the projected budgetary deficit was expected to be lower than predicted and unemployment could well drop below 6 % in the coming months. All in all a vindication of the policy position I have been suggesting for a long time. The most effective way to respond to an economic shock like the crash and subsequent slump is to run a significant budget deficit which invests in people, their social and educational needs and physical infrastructure combined with a strongly accommodating monetary policy using quantitative easing where appropriate to ensure low interest rates. This is what has been done and the results are positive.