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The Federal Open Market Committee on Thursday announced that it has approved changes to its written policy strategy that are widely seen as leading to an easier monetary policy stance over time.
In a statement, the Fed said that it has adopted an “average inflation target” and recognizes the benefits for a strong labor market.
The announcement of the new strategy was timed for Fed Chairman Jerome Powell’s speech to the Jackson Hole economic symposium, to be held virtually this year.
In the past, Fed chairman have used the conference to make major policy announcements.
“It is hard to overstate the benefits of sustaining a strong labor market, a key national goal,” Powell said in his prepared remarks discussing the policy shift.
That statement would not have come from a central banker a generation ago. In the past, strong labor markets meant that higher inflation was just around the corner and a reason to tap the brakes and raise interest rates.
It is now the Fed’s view that “a robust job market can be sustained without causing an outbreak in inflation.”
The Fed’s strategy retains 2% annual growth of inflation as a target but the Fed said it “seeks to achieve inflation that averages 2% over time.”
“Following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time,” the new policy says.
Global oversupply has created deflationary forces that have bedeviled foreign central banks as the traditional tool of cutting interest rates to spur employment no longer is effective. Too low inflation saps energy from economies. Foreign central banks have pushed their benchmark interest rates into negative territory to try to spur demand.
This is a circumstance the Fed wants to avoid.
“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. We want to do what we can to prevent such a dynamic from happening here,” Powell said.
The Dow Jones Industrial Average DJIA, +0.83% was up 84 points on Wednesday and was staked to a roughly equal gain at Thursday’s opening bell ahead of the Fed chairman’s speech.
