Federal Reserve Announces New Approach To Inflation To Spur Economic Growth

(PatrioticPost.com)- The Federal Reserve is doing all it can to help invigorate the economy.

On Thursday, Chairman Jerome Powell announced another major policy shift the Fed hopes will drive prices lower and result in job gains, too.

The central bank’s new plan will be to keep inflation at an average of 2% instead of right at that target. The Fed will now tolerate higher levels of inflation at times in exchange for longer periods of wage increases and low prices.

Referring to the Federal Open Market Committee, Powell said:

“Because the economy is always evolving, the FOMC’s strategy for achieving its goals — our policy framework — must adapt to meet the new challenges that arise. The persistent undershoot of inflation from our 2% longer-run objective is a cause for concern.”

Inflation that happens at a rapid pace can have major risks associated with it. Moderate levels of wage increases and price as well could bring economic growth at a broader level, which would result in overall prosperity. Low inflation can also force the Fed to keep its interest rate close to zero for long periods of time, which would limit the central bank’s ability to help stimulate the economy during downturn periods.

As Powell said during his announcement Thursday:

“We have seen this adverse dynamic play out in the 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.”

The Fed’s new approach, Powell said, would focus less on the inflationary risks of low unemployment and more on what benefits a strong labor market would bring. The Fed will now focus on “assessments of the shortfalls of employment from its maximum level” rather than of “deviations from its maximum level.”

“This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation,” Powell said.

In late 2018, the Fed reviewed its approach to inflation, because the steady drop in the unemployment rate didn’t drive wage increases and the rate of price to its target. The Fed originally thought that a consistent low unemployment rate would lead to inflation, but it never did.

This new shift, Powell explained, is so the bank can focus on the employment side of its mandate. It’s natural for the Fed to consistently review its policies, benchmarks and goals, he said, as different economic events happen. This occurred with many of Powell’s predecessors, including Paul Volcker, Alan Greenspan and Janet Yellen.

As he said:

“We believe that conducting a review at regular intervals is a good institutional practice, providing valuable feedback and enhancing transparency and accountability. And with the ever-changing economy, future reviews will allow us to take a step back, reflect on what we have learned and adapt our practices as we strive to achieve our dual-mandate goals.”