Federal Reserve Chair Jerome Powell did not raise many eyebrows Thursday morning when he announced the U.S. central bank would encourage some periods of inflation above its 2% target in certain circumstances to boost the long-term economy.
In remarks before a virtual version of the annual Jackson Hole symposium, Powell said the Fed was looking to bolster the labor market, though this is largely an issue Congress would have to deal with amid the ongoing COVID-19 pandemic. The current recession differs from most previous financial downturns because of its underlying cause; namely, lockdowns rather than the after-effects of an overheated economy, he said.
“If inflation runs below 2% following economic downturns but never moves above 2% even when the economy is strong, then, over time, inflation will average less than 2%,” he said. “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.”
“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% over time. Therefore, following periods when inflation has been running below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time.”
Thursday’s new approach to monetary policy comes after a year-long review of the Fed’s previous strategy, Powell said.
Ben Emons, managing director at macro research firm Medley Global Advisors, told CoinDesk the speech and the Fed’s new framework “basically matched market expectations.”
“For some time now the discussion has been moving to a more flexible framework targeting inflation,” he said.