There are reasonable arguments for why Janet Yellen and her colleagues at the Fed should start raising interest rates. But there’s perhaps an even better argument for leaving them alone. Photograph by Alex Wong/Getty

As you head to the beach or the movies during Labor Day weekend, spare a thought for Federal Reserve chair Janet Yellen and her colleagues. For months now, they’ve been umming and ahhing about whether to start raising short-term interest rates, which they have kept at close to zero per cent since December, 2008. Last week, Stanley Fischer, Yellen’s deputy, indicated that the Fed wanted to see August’s job figures before making a decision about whether to go ahead with a rate hike later this month.

The Labor Department released the new figures on Friday morning, but they didn’t make the Fed’s job much easier. The headline jobless rate dipped from 5.3 per cent to 5.1 per cent, which is the lowest mark since April of 2008. A year ago, the number of people who were searching for a job but couldn’t find one was about nine and a half million. In August, the figure was just more than eight million.

That’s obviously good news, although it doesn’t account for the large number of people who have left the workforce. In August, 62.6 per cent of non-institutionalized people aged sixteen to sixty-five were working or looking for work, compared to 65.8 per cent in August of 2007, before the Great Recession. As I’ve noted many times, the fall in the so-called participation rate has been huge, and there’s still no sign that it is reversing course.

Still, steady U.S. job growth confirms that the long recovery from the slump is proceeding. Since the start of the year, employers have added nearly 1.7 million jobs. August’s payroll figure of a hundred and seventy-three thousand was a bit lower than Wall Street had been expecting, but the month-to-month figures always jump around quite a bit, and it always pays to take a longer view. Since September, 2010, when total employment bottomed out, the U.S. economy has generated about twelve million jobs, the vast majority of them in the private sector. As the White House points out on a regular basis, the recent run of private-sector job creation is virtually unprecedented.

On this basis, there appears to be a reasonable argument for the Fed to start raising rates. After all, the policy of keeping interest rates close to zero per cent was introduced as a temporary response to an economic emergency. Now that the emergency is well behind us, isn’t it time for policy makers to start normalizing things? Not necessarily. The Fed’s dilemma is that there is an equally plausible—perhaps more plausible—argument for standing pat.

Under the Federal Reserve Act, the Fed is obliged to pursue two targets: price stability and maximum employment. As the Fed interprets this mandate, its task is to achieve the highest level of employment growth (and G.D.P. growth) consistent with its inflation target of two per cent. Economic theory says that higher rates of employment and lower rates of unemployment eventually lead to higher rates of inflation. At some point, therefore, the Fed, in order to prevent inflation from overshooting its target, will be obliged to tap the brakes by raising rates.

However, the data suggests that we are still well short of reaching the point at which inflation becomes a threat. Indeed, inflation, far from picking up, has been falling sharply. In July, the latest month for which we have figures, the prices paid by consumers didn’t rise at all. Yes, that’s right: there wasn’t any inflation. The consumer price index, which measures the prices of a broad basket of items purchased by people living in urban areas, [#image: /photos/59097030019dfc3494ea2077]

To be sure, these figures can be parsed in various ways. For one thing, they aren’t seasonally adjusted. Making the adjustment doesn’t make much difference, though. In July, the seasonally adjusted C.P.I. rose by 0.1 per cent, which is next to nothing. While the cost of some things, such as real estate and apartment rentals, are rising, energy prices have fallen sharply, delivering a bonus to households and a big deflationary shock to the economy. How big? According to the Bureau of Labor Statistics, in the twelve months leading up to July, energy prices tumbled by almost fifteen per cent.

Right now, about the only argument inflation hawks have left is that we should ignore energy costs because they’re volatile by nature. I’ve never really understood this argument, but even if we do exclude the prices of things like gasoline and electricity, there is little indication that inflation picking up. To the contrary, as the accompanying chart shows, the rate of so-called “core inflation,” which leaves out food and energy costs, has fallen in the course of the past three years. In July, 2012, this measure of inflation was running at 2.1 per cent. In July of this year, the figure was 1.8 per cent.

At this juncture, then, deflation is arguably a bigger threat than inflation. The low workforce-participation rate implies that there is more slack left in the labor market than the headline unemployment rate would suggest. The international situation is also unsettled. And the recent strengthening of the dollar has already delivered what effectively amounts to a modest tightening in policy. So are there any remaining considerations that could lead Yellen and her colleagues to decide that now is the time to raise rates?

First, and perhaps most important, is a concern about financial stability. If we’ve learned anything in the past twenty years, it is that extended periods of cheap money tend to generate speculative bubbles, which inevitably burst. At the moment, however, the Fed believes that the threat of bubbles is contained (or at least, that is what Yellen and other officials have said in recent speeches), leaving them with no immediate justification for raising rates.

A second argument for action, which may seem a bit paradoxical, is that the Fed needs to raise rates now so that it can cut them in the next recession. With the federal funds rate at zero, the central bank can’t reduce them any further. This means that if something bad happened, such as an outright collapse of the Chinese economy and a subsequent crash of the global financial markets, the bank’s only option would be return to the policy known as quantitative easing—creating money and using it to buy bonds—which it embraced from 2008 to 2014. But the effects of Q.E. are disputed, and the Fed would much prefer to have other tools at hand.

A third possible justification for acting now—and this is one that Fed officials would never acknowledge publicly—is politics. If Yellen and her colleagues wait for a few more months, and the unemployment rate continues to fall, they could well find themselves raising rates just as the Presidential campaign moves into full swing. That would place them in a very uncomfortable spot, especially if things go wrong. The timing of interest-rate changes is controversial at the best of times, and more so during an election year. Even today, some Republicans believe that Alan Greenspan, by failing to cut interest rates sufficiently in 1992, cost George H.W. Bush reëlection to the White House. If the Fed were to act now, it could well get in a couple of hikes before 2015 ends. Then, conceivably, it could stand aside until after the election.

So, which way will the Fed jump? I don’t know. Surely, though, it’s not the central bank’s job to play politics. On the basis of economics, it should hold its fire, at least for now.