Kathmndu, August 27
Fed pledges to focus on low unemployment and tolerate higher inflation.
The Federal Reserve, in a significant shift that could keep interest rates low for longer periods, said it would focus on keeping unemployment low and allow inflation to run slightly higher in good times.
The Fed chair, Jerome H. Powell. announced the change in a speech on Thursday at the Kansas City Fed’s annual Jackson Hole symposium that was accompanied by an updated long-run statement describing the Fed’s policy strategy. He said the shifts would allow the gains of a strong economy to benefit a wide range of workers.
“Our revised statement emphasizes that maximum employment is a broad-based and inclusive goal,” Mr. Powell said in remarks prepared for delivery Thursday, and “this change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”
The Fed had been raising rates as joblessness fell to avoid economic overheating that ended in breakaway inflation, but in recent years, price gains have been tepid. The changes are an explicit recognition that too low, rather than too high, inflation is the problem.
By emphasizing the importance of a strong labor market and underlining the Fed’s modesty in understanding how long, and how far, unemployment can fall, Mr. Powell and his colleagues used their updated framework to lay the groundwork for longer periods of low interest rates, which could translate into both long periods of cheap mortgages and business loans and stronger future job markets.
Mr. Powell, in explaining the changes, said that “with interest rates generally running closer to their effective lower bound even in good times, the Fed has less scope to support the economy during an economic downturn by simply cutting the federal funds rate.”
The result, he said, “can be worse economic outcomes in terms of both employment and price stability, with the costs of such outcomes likely falling hardest on those least able to bear them.”
Mr. Powell acknowledged that it might seem “counterintuitive that the Fed would want to push up inflation” which, in turn, raises prices. But he the trade-off was a less robust economy that did not deliver gains evenly.
“We are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes,” he said. “However, inflation that is persistently too low can pose serious risks to the economy.”