JACKSON HOLE, Wyo.–Federal Reserve Chairman Jerome Powell has offered additional details around the Fed’s overarching strategy for setting monetary policy, which is reviewed every five years.
Powell’s comments came during remarks delivered as part of the Fed’s annual retreat and policy meeting in Jackson Hole, Wyo., where the chairman also sent a signal the Fed could reduce rates at its September meeting, as the CU Daily reported here.
When it comes to the strategy for setting rate policy, the changes amount to a “gutting of the 2020 version, which was rolled out at that year’s Jackson Hole conference and marked a sea change in the way the central bank thought about its economic goals and how to achieve them,” the New York Times said in its analysis.
Key Objective
“A key objective has been to make sure that our framework is suitable across a broad range of economic conditions,” Powell said. “During this period, we saw that the inflation situation can change rapidly in the face of large shocks.”
As the Times noted, the 2020 framework established that the Fed would temporarily tolerate periods of higher inflation to make up for past stretches when it was too low, with an aim to average 2% over time.
The report explained that this “flexible average inflation targeting” approach was a direct response to the environment that the central bank found itself in after the global financial crisis, with inflation languishing below the Fed’s target and interest rates close to zero.
In his remarks Powell confirmed the Fed plans to scrap what he described as the earlier “makeup strategy,” adding that “the idea of an intentional, moderate inflation overshoot had proved irrelevant.”
In addition, he said the Fed would reverse course on a stipulation in 2020 that it would set monetary policy with an aim to address “shortfalls” of employment from its maximum level, rather than by “deviations.”
At the time, that meant it would not hasten to raise interest rates just because joblessness had fallen; it would need to see clear evidence that inflation was rising in a sustainable way, the Times added.
