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Financial News: Fed Chair Powell Announces Shift To 'Average Inflation

Fed Chair Powell Announces Shift To 'Average Inflation Targeting'

08/27/2020 - 10:04:00 (RTTNews)

(RTTNews) - In a highly anticipated speech on Thursday, Federal Reserve Chair Jerome Powell announced a widely expected shift with regard to the price-stability side of the central bank's dual mandate.

Powell revealed in a live-streamed speech to the Jackson Hole economic symposium that the Fed will change its approach to a "flexible form of average inflation targeting."

The Fed chief stressed that the longer-run goal continues to be an inflation rate of 2 percent but noted inflation will average less than that if it runs below 2 percent following economic downturns and never moves above that level even when the economy is strong.

"Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down," Powell said.

He added, "To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time."

Powell said appropriate monetary policy will therefore likely aim to achieve inflation moderately above 2 percent following periods when inflation has been running below that level.

"In seeking to achieve inflation that averages 2 percent over time, we are not tying ourselves to a particular mathematical formula that defines the average," Powell said. "Thus, our approach could be viewed as a flexible form of average inflation targeting."

Powell stressed the Fed's monetary policy decisions will not be dictated by any formula and said the central bank will not hesitate to act if excessive inflationary pressures were to build.

With regard to the employment side of the Fed's dual mandate, Powell noted the central bank's revised strategy emphasizes that maximum employment is a broad-based and inclusive goal.

The Fed chief said the revised statement says policy decisions will be informed by "assessments of the shortfalls of employment from its maximum level" rather than by "deviations from its maximum level."

"This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation," Powell said.

Powell acknowledged the revisions partly reflect the way the Fed has been conducting policy in recent years but said there are some important new features.

"Overall, our new Statement on Longer-Run Goals and Monetary Policy Strategy conveys our continued strong commitment to achieving our goals, given the difficult challenges presented by the proximity of interest rates to the effective lower bound," Powell said.

"In conducting monetary policy, we will remain highly focused on fostering as strong a labor market as possible for the benefit of all Americans," he added. "And we will steadfastly seek to achieve a 2 percent inflation rate over time."

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