By Jonathan Garber FOXBusiness
New policy will help the central bank to more easily adapt to challenges facing US economy.
The Federal Reserve unanimously approved changes to its strategy that paves the way for interest rates to remain low for years.
The updated framework will help the central bank more easily adapt to new challenges facing the U.S. economy and better achieve its dual mandate of price stability and maximum employment.
“Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation,” said Federal Reserve Chairman Jerome Powell.
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Going forward, the central bank will allow inflation to average 2%, meaning it can run moderately above that level “for some time” following periods of persistently low prices. Policy decisions will also be based on the size of the unemployment shortfall versus a “deviation.”
The changes mean the central bank will no longer raise interest rates following a drop in unemployment, which it had done for decades to preemptively stamp out a rise in inflation. The strategy is an acknowledgment that the Phillips Curve, which suggests economic growth brings inflation and therefore more jobs and lower unemployment, is dead.
The Fed slashed interest rates twice in March, lowering its fed funds rate to near zero from a range between 1.5% and 1.75% in order to cushion the U.S. economy amid lockdowns aimed at slowing the spread of COVID-19. The central bank also pledged to buy an unlimited amount of assets to bolster the economic recovery.
Powell, in 2018, called on the Fed to review its policies amid concerns central banks around the world were unable to generate inflation despite bringing interest rates to the zero bound, or lower.
“We have seen this adverse dynamic play out in other major economies around the world and have learned that once it sets in, it can be very difficult to overcome,” Powell said. “We want to do what we can to prevent such a dynamic from happening here.
