English
The Fed Chairman announces a new approach to inflation that could keep interest rates low for a longer period
The Fed announced at its meeting in Jackson Hole a major shift in monetary policy, saying it was prepared to allow inflation to rise more than usual in order to support the labor market and the wider economy.
In a move that Chairman Jerome Powell called a "robust modernization" of the Fed policy, the US Fed has formally approved the policy of "targeting medium inflation". This means that inflation will be allowed to operate "moderately" above the Fed target of 2% "for some time" after periods when it was below that target.
"Many people find it illogical for the Fed to want to increase inflation," Powell said in prepared remarks. "However, inflation that remains very low can pose serious risks to the economy."
Powell noted that the interest rate level that neither restrains nor pushes growth has decreased significantly over the years and is likely to remain there.
Powell said the situation "could lead to an unwanted reduction in long-term inflation expectations, which in turn could lead to de-facto inflation, leading to a counter-cycle to consistently low inflation and inflation expectations."
As a result, policymakers are left with little room to cut rates in times of economic stress.
Change the recruitment approach
In addition to the shift in inflation, the Fed also announced a policy change that changes its approach to employment.
"This change reflects our appreciation of the benefits of a strong job market, particularly for many in low and middle income societies," Powell said. "This change may appear subtle, but it reflects our view that a strong labor market can continue without causing widespread inflation."
The Fed expressed concern about the impact of the coronavirus pandemic on people who are least able to tolerate it, so the change to language represents a step to address the situation as the economy recovers.
Powell said the Fed will not set a specific target for the unemployment rate but will allow conditions to dictate what it considers to be full employment. The Fed’s previous forecast had expected inflation to rise long before the 3.5% drop in the generations that unemployment hit before the epidemic, but this did not happen.
Powell said the Fed still believes that the 2% inflation rate remains the appropriate target over time.
