Powell unveils Fed approach to inflation maintaining low interest rates

Powell unveils Fed approach to inflation maintaining low interest rates

The Fed announced a major policy shift to average inflation targeting as well as addressing employment through amending a 2012 strategy.

This year, the Fed has been highly involved in trying to keep the economy afloat. With the recent change in policy on tackling inflation, it also focused its approach to employment by amending the Statement on Longer-Run Goals and Monetary Policy Strategy.

These changes to inflation, as well as employment, could hopefully maintain the low-interest rates at least until this pandemic is over.

Changing the perception of inflation

In the prepared remarks of the Jackson Hole Economic Policy Symposium, Fed Chairman Jerome Powell said:

“Many find it counter-intuitive that the Fed would want to push up inflation […] However, inflation that is persistently too low can pose serious risks to the economy.”

With this in mind, the Fed has adjusted its strategy for achieving its longer-run inflation goal that averages 2% over time. Historically, the Fed has struggled to hit its 2% inflation target.

40 years ago, former Fed chairman Paul Volcker went through a controversial series of rate hikes that sought to squash inflation.

Although Powell did not mention how much higher he’d like to see inflation run, Dallas Fed President Robert Kaplan told CNBC that “he would be content with a range” around 2.25% to 2.5%.

Stable prices and labor markets

Monetary policy actions tend to influence economic activity, employment, and prices with a lag. The Fed now focuses on mitigating “shortfalls” in full employment, which is more important compared to when job growth is stronger than what is viewed as the sustainable rate.

Moreover, sustainably achieving maximum employment and price stability depends on a stable financial system.

The Federal Open Market Committee (FOMC) reported that it would continue its practice of considering the Statement of Longer-Run Goals and Policy each January and that it intends to undertake a public review of its monetary policy strategy roughly every 5 years.

Featured image courtesy of KansasCityFed/YouTube Screenshot

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