US Federal Reserve Chairman Jerome Powell on Thursday unveiled a new approach to setting US monetary policy, letting inflation and employment run higher in a shift that will likely keep interest rates low for years to come.
Following a more than year-long review, Powell said the Fed would seek inflation that averages 2 percent over time, a step that implies allowing for price pressures to overshoot after periods of weakness.
It also adjusted its view of full employment to permit labor-market gains to reach more workers.
Photo: EPA-EFE
“Maximum employment is a broad-based and inclusive goal,” Powell said in a speech delivered virtually for the central bank’s annual policy symposium traditionally held in Jackson Hole, Wyoming. “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”
During the longest US economic expansion on record until the COVID-19 pandemic hit earlier this year, many groups benefited — including minorities and women. With millions out of work and unrest flaring up across the US over racial inequality, questions about how the Fed’s policy helps diverse communities have been raised.
While the new strategy does not target a specific rate of unemployment broadly or for certain demographic groups, it does give the central bank flexibility to let the job market run hotter and inflation float higher before taking action.
“They really, really, really are not going to be raising interest rates any time soon,” said James Knightley, chief international economist at ING Financial Markets.
“The Fed is saying rates will be lower for longer, but don’t worry, inflation is not going to be picking up,” he added.
Achieving an overshoot of inflation in the near term would be difficult.
Unemployment is above 10 percent, and the economy is still recovering from the shock of virus shutdowns that inflicted the steepest recession on record.
Powell’s speech left the matter of how tactically the bank would aim for higher inflation for future Federal Open Market Committee meetings.
With the new strategy in place, Goldman Sachs chief economist Jan Hatzius said he now expects “changes to the forward guidance and asset purchase program to come at the September” policy meeting.
St Louis Fed President James Bullard later said in an interview on Bloomberg Television with Michael McKee that “we’re going to try to make up for past misses,” but judgements about how to do so were for policymakers and there are different opinions around the table.
“If you wanted to stay on the price-level path that was established from 1995 to 2012 you could run 2.5 percent inflation for quite a while,” he said.
In the new statement on longer-run goals, the Fed said its decisions would be informed by its assessment of “shortfalls of employment from its maximum level.”
The previous version had referred to “deviations from its maximum level.”
The change de-emphasizes previous concerns that low unemployment can cause excess inflation.
While expected, the announcement of the strategy shift came sooner than some thought. After first fluctuating on the news, US stocks resumed their record-breaking rally and the US Treasury yield curve steepened to the widest in two months, as traders bet policy rates would remain locked near zero for even longer.
Calling the revised strategy “a robust updating,” Powell said that after periods when inflation has been running below 2 percent, monetary policy would likely aim to achieve inflation moderately above 2 percent for some time.
The shift he announced is a product of an unprecedented review of the Fed’s strategies, tools and approach to communications that began early last year.
Fed officials said they would now conduct such reviews about every five years.
Since the central bank officially set its inflation target at 2 percent in 2012, the Fed’s preferred measure of price increases has consistently fallen short of that objective, averaging just 1.4 percent.
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