The Federal Reserve on Thursday rolled out a sweeping rewrite of its approach to its dual role of achieving maximum employment and stable prices, putting new weight on bolstering the US labour market and less on worries about too-high inflation. The US central bank’s new monetary policy strategy, unveiled at the start of an annual central banking conference, pledges to address “shortfalls” from the “broad-based and inclusive goal” of full employment, a nod to research showing racial income disparities hold back economic growth.
It also promises to aim for 2 per cent inflation on average, so that periods of too-low inflation would likely be followed by an effort to lift inflation “moderately above 2 per cent for some time.”
The change suggests the US central bank’s key overnight interest rate, already near zero, will stay there for potentially years to come as policymakers woo higher inflation.
“It’s no news that (Fed Chair Jerome) Powell doesn’t want to raise interest rates,” said Vincent Reinhart, chief economist at Mellon. What is news, Mr Reinhart said, is that the Fed has now enshrined a degree of tolerance for inflation in its guiding document.
The policy shift is arguably the biggest for the Fed since Paul Volcker remade the central bank into an inflation-slaying force four decades ago, when prices were spiraling higher.
Mr Powell’s new policy blueprint, designed for a world where weak inflation, low interest rates, and slow economic growth appear to be here to stay, puts the labour market front and center.
The changes acknowledge, the Fed said in its description of its new strategy, that “downward risks to employment and inflation have increased”, and include a new promise to use the central bank’s “full range of tools” to achieve its goals of stable prices and a strong labour market. All 17 Fed policymakers signed on to the new strategy.
“Our revised statement reflects our appreciation for the benefits of a strong labour market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation,” Mr Powell said as he explained the changes at the start of the Kansas City Fed’s central banking conference.
The gathering is normally held in Jackson Hole, Wyoming, but was convened this year online because of the coronavirus pandemic.
“It is hard to overstate the benefits of sustaining a strong labour market, a key national goal that will require a range of policies in addition to supportive monetary policy,” Mr Powell said.
On Thursday, the US central bank released a library of staff papers and research on the topic, including one arguing that average inflation targeting would help a broad set of Americans benefit from the economy.
Issues such as income distribution have traditionally been considered out of the Fed’s domain, but the differing economic outcomes among different groups of people has been a focus of recent research that concluded the economy as a whole can benefit from more inclusive policies.