Washington, Aug 28 | US Federal Reserve Chairman Jerome Powell announced that the central bank will seek to achieve inflation that averages 2 percent over time, a new strategy for carrying out monetary policy to help fight the COVID-19 pandemic and boost economic recovery.
“Therefore, following periods when inflation has been running below 2 per cent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 per cent for some time,” Powell said in remarks to the Kansas City Fed’s annual Jackson Hole research conference on Thursday, which is being held virtually this year because of the pandemic, Xinhua news agency reported.
“Our approach could be viewed as a flexible form of average inflation targeting. Our decisions about appropriate monetary policy will continue to reflect a broad array of considerations and will not be dictated by any formula,” he said.
The new approach came after the Federal Open Market Committee, the Fed’s policy-making committee, on Thursday formally approved a revamp of the central bank’s statement on longer-run goals and monetary policy strategy following a yearlong review of its monetary policy framework.
The revised statement also shows that the Fed’s policy decision will be informed by the “assessments of the shortfalls of employment from its maximum level” rather than by “deviations from its maximum level” in the previous statement, Powell noted.
“This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation,” he said.
Powell also said that the new strategy explicitly acknowledges the challenges posed by “the proximity of interest rates to the effective lower bound.”
“By reducing our scope to support the economy by cutting interest rates, the lower bound increases downward risks to employment and inflation. To counter these risks, we are prepared to use our full range of tools to support the economy,” he said.
The Fed’s shift to average inflation targeting means that the central bank will operate with a temporarily higher inflation target, where “temporarily” is measured in several years, according to Roberto Perli, a former Fed staffer and now head of global policy research at Cornerstone Macro.
“The policy regime shift at the Fed is significant and makes it more asymmetric. The language on employment side of equation is pretty clear. The road to further accommodation & unorthodox policy is wide open,” echoed Joseph Brusuelas, chief economist at accounting and consulting firm RSM US LLP.
The Fed last month kept its benchmark interest rate unchanged at the record-low level of near zero while warning that a recent resurgence in COVID-19 cases nationwide started to weigh on economic recovery.
The Fed cut interest rates to near zero at two unscheduled meetings in March and began purchasing massive quantities of US treasuries and agency mortgage-backed securities to repair financial markets. It also unveiled new lending programs to provide up to US $2.3 trillion to support the economy in response to the coronavirus outbreak.
The US economy contracted at a revised annual rate of 31.7 per cent in the second quarter amid mounting COVID-19 fallout, the US Commerce Department reported Thursday.