The Federal Reserve announced a major policy shift Thursday, according to CNBC’s Jeff Cox. Chairman Jerome Powell states that the federal organization is willing to allow inflation to run higher than normal in order to support the labor market and broader economy. The central bank has formally agreed to a policy of “average inflation targeting,” meaning it will allow inflation to run “moderately” above the Fed’s 2% goal “for some time” following periods when it has run below that objective.
The changes were codified in a policy blueprint called the “Statement on Longer-Run Goals and Monetary Policy Strategy,” first adopted in 2012, that has informed the Fed’s approach to interest rates and general economic growth.
As a practical matter, the move means the Fed will be less inclined to hike interest rates when the unemployment rate falls, so long as inflation does not creep up as well. Central bank officials traditionally have believed that low unemployment leads to dangerously higher levels of inflation, and they’ve moved preemptively to head it off.
However, a speech Powell delivered to a virtual gathering of the Fed’s annual Jackson Hole, Wyoming, symposium, and accompanying documents that codified the new policy, signaled a shift away from the old thinking. The policymaking Federal Open Market Committee approved the changes unanimously.
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