The world economy IS the Fed's problem

Economists say, "When America sneezes, the world catches cold," an expression that suggests that the U.S. must remain healthy for the world economy to grow. And while that remains largely true, today the world is sneezing and America is, at the very least, getting the sniffles.

With a serious growth recession underway in China, a technical recession looming in Japan, stalled growth in Europe and full-blown recessions in Russia, Brazil and many emerging market nations, the U.S. economy has softened appreciably.

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That overseas weakness has been exported to the U.S. and it has been borne out in the latest batch of economic numbers.

The ISM manufacturing data are hovering at levels just slightly above numbers that would indicate a contraction in domestic industrial activity.

The pace of job growth has slowed meaningfully in the past two months, as jobs in the recently booming energy patch have been slashed amid a crash in crude prices. The elimination of those high-paying jobs and the billions of dollars in new energy projects that have been canceled have had a meaningful impact on a sector that had been providing a significant lift to several regions of the country.

In addition, the rest of the world's chief export has been deflation, with commodity prices crashing, inflation moving lower, and the risk of a vicious cycle of currency devaluations weighing on world markets.

Thus, the Fed was right to delay its first interest rate hike in nearly a decade, when it passed on raising rates in September.

With the world getting more fluish by the day, it would seem the Fed will be less likely to administer a shot to the U.S. economy, whose side effects would worsen the world's current ills.

Many have complained that the Fed, by concerning itself with weakness in the world economy, is adding a "third mandate" to its congressionally mandated "dual mandate." The Fed, by statute, is supposed to ensure stable prices and maximum sustainable employment.

Reacting to the world economy, they say, is not part of that process. But it is … if that worldwide weakness threatens to affect domestic activity. Hence, the Fed's recent actions are consistent with its mandate to do what is best for the U.S. economy, all variables considered.

To put this in the simple terms of Snow White, there are three characters in this animated Fed scenario … "Sneezy," the outside world, "Doc," the Fed, and "Dopey," the Fed's critics who claim that by factoring in the world economy, the Fed is exceeding its statutory powers.

As "Doc," the Fed's committed to the Hippocratic oath … first, do no harm.

And that's what the Fed just did … it did not harm the U.S. by delaying the rate hike. Put another way, what if the Fed had raised rates in September only to find out last Friday that job growth had slowed appreciably in September and was revised significantly downward in August.

The Fed would have looked dopey and the economy might have not only been sneezier, but more than a few folks would have gotten grumpy about an ill-timed move to normalize rates.

The Fed would dearly love to hear more and more workers singing, "Heigh-Ho!"

And until the world stops sneezing, the Fed cannot, and should not, violate its doctor's oath to first do no harm.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.