The Federal Reserve on Thursday said it was adjusting its long-standing dual mandate of full employment and price stability, adopting what was widely interpreted as easier and more flexible monetary policy in the face of the worst economic downturn since the Great Depression.
In prepared remarks at the Kansas City Federal Reserve’s annual Jackson Hole symposium, which is taking place virtually this year, Federal Reserve Chairman Jerome Powell said the Fed will shift its definition of “maximum employment,” and also amend its focus on inflation by relaxing its 2% inflation target.
The announcement, the Fed’s first policy framework change in more than right years, marks a new era in how the Fed approaches monetary policy, encapsulating a year-long strategy review of the central bank’s longer-term goals and monetary policy strategy.
"The economy is always evolving, and the FOMC's strategy for achieving its goals must adapt to meet the new challenges that arise," Powell said Thursday.
"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."
“The era of easy money is here,” said Mike Loewengart, Managing Director, Investment Strategy with E*TRADE Financial. “Loosening up on target inflation ushers in a new age of low rates for the foreseeable future.”
For many years, the Fed has focused on the two-fold mandate of raising interest rates to combat rising prices for consumer goods and services, and, at the same time, adjusting monetary policy to ensure its definition of “full employment” was consistently achieved.
However, with inflation remaining entrenched well below the Fed’s 2% target and with definitions of what a job is and how it is defined, calculated and measured having changed dramatically in recent years, the Fed unanimously agreed on Thursday to amend its policy framework — saying it will base its interest rate decisions on more hard data, and less so on forecasts.
“The persistent undershoot of inflation from our 2% longer-run objective is a cause for concern,” Powell said Thursday. While it might be counterintuitive for the Fed to desire higher costs for consumers and businesses, Powell said the Fed needed to avoid “an adverse cycle of ever-lower inflation and inflation expectations.”
Among the more significant changes to the framework document were:
- On maximum employment, the Federal Open Market Committee emphasized that maximum employment is a broad-based and inclusive goal and reports that its policy decision will be informed by its "assessments of the shortfalls of employment from its maximum level." The original document referred to "deviations from its maximum level."
- On price stability, the FOMC adjusted its strategy for achieving its longer-run inflation goal of 2% by noting that it "seeks to achieve inflation that averages 2 percent over time." To this end, the revised statement states that "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 updates to the strategy statement explicitly acknowledge the challenges for monetary policy posed by a persistently low interest rate environment. Here in the U.S. and around the world, monetary policy interest rates are more likely to be constrained by their effective lower-bound than in the past.