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The Problem With Unobservable Variables

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Inflation has climbed above the Federal Reserve's target of 2 percent. According to the Personal Consumption Expenditures price index, the Fed's preferred inflation measure, prices climbed by 2.3 percent in the year through the end of May.

Price stability is one of the Fed's mandates. So should the Fed now act to bring inflation back down to 2 percent? There are reasons to think it shouldn't bother, at least not yet. For one thing, the variables pushing inflation higher might be temporary. Another reason is that inflation has been below the target for most of the recovery, so a period of inflation modestly above target shouldn't be much of a concern.

On the show, we speak with Sarah Bloom Raskin, formerly a governor on the Federal Reserve Board, who adds that the Fed needs to give just as much consideration to its second mandate, maximum employment. Although the unemployment rate is lower than the Fed's estimate for maximum employment, Raskin says that other indicators tell a different story.

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