By Alex Eule | Thursday, August 27
Rethinking
Inflation. As
chairman of the Federal Reserve, Jerome
Powell has
given lots of important speeches, but his comments today may end up
being the most consequential. In a virtual event that would have otherwise
come during the Federal Reserve Bank of Kansas City's annual Jackson
Hole, Wyo., symposium, Powell said the Fed was officially untethering
itself from a long-running goal of 2% inflation. Given what we
have learned about the economy since the financial crisis, Powell said a
strict 2% figure had essentially become obsolete.
His speech
today makes for surprisingly interesting reading, and it
doesn't take an economics degree to understand. But here's the condensed
version: The Fed is giving itself more leeway to set policy in the
coming years. Here's an excerpt from the speech:
Our new statement indicates that we will seek to
achieve inflation that averages 2 percent over time. Therefore, following
periods when inflation has been running below 2 percent, appropriate monetary
policy will likely aim to achieve inflation moderately above 2 percent for
some time.
Ultimately, the new approach to inflation will
allow the Fed to keep rates low for an extended period of time, even if
inflation begins to creep higher.
The Dow Jones Industrial
Average rose
on the news. It was up nearly 300 points by 11 a.m., though it gave back
some of those gains and finished up 160 points, or 0.6%.
"The Fed is leaning toward a little more art than
science when it comes to determining when it is time to raise rates and
curtail inflation,” Greg McBride, Bankrate's chief financial
analyst, said in a statement today.
The new framework is likely to have an impact
on how the central bank thinks about employment, too. Powell
said that the Fed's shift "reflects our view that a robust job
market can be sustained without causing an outbreak of inflation."
That's notable since stronger employment levels have
historically led to worries about inflation, forcing the Fed to choose
between the two. No longer. Here's McBride:
The Fed has also explicitly defined their maximum
employment goal as being both broad-based and inclusive, acknowledging how
economic prosperity has often failed to reach all segments of society and
being cognizant of that when setting policy in the future.
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