The U.S. Federal Reserve announced a major policy shift Thursday, saying that it is willing to allow inflation to run higher than the standard 2% target before hiking interest rates. The Fed is changing this policy in order to support the labor market and broader economy.
The central bank formally agreed to a policy of “average inflation targeting,” In a move that Chairman Jerome Powell called a “robust updating” of Fed policy. That means 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.
In addition to the inflation change, the Fed changed its approach to employment in a way that will focus on those at the lower end of the income spectrum.
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 in accompanying documents that codified the new policy, signaled a shift away from the old thinking.
“Many find it counterintuitive that the Fed would want to push up inflation,” Powell said in prepared remarks. “However, inflation that is persistently too low can pose serious risks to the economy.”
Since the end of the financial crisis, the Fed has struggled to hit its 2% inflation target. Officials hope that the new approach will change the landscape, raising expectations and allowing inflation to float higher.
In addition to the shift on inflation, the Fed also announced a policy tweak that changes the approach to employment… Powell said it is significant.
“This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities,” he said. “This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation.”
The Fed has expressed concern about the impact the coronavirus pandemic has had on those least able to shoulder it, so the change to language represents a move to address the situation as the economy recovers.
CNBC’s Jim Cramer gave Fed Chairman Jerome Powell high marks for updating the central bank’s approach to monetary policy to help the U.S. economy recover from the coronavirus.
Cramer said that Powell basically signaled in Thursday’s speech: ”‘Hey guys, just go. Go get the economy back. I am not going to get in the way of it.’”
“Powell is on the side of the bulls,” Cramer said on “Squawk on the Street.”
Cramer said Powell and the Fed have come down on the side of the “working person.”
“He’s not listening to people who say, ‘You better start worrying about inflation now.’ He’s looking about employment and realizing, you know what, we’ve got to be sure that we don’t go back into a depression after we’ve had some nice comeback,” Cramer said.
White House senior advisor Jared Kushner on Thursday praised Federal Reserve Chairman Jerome Powell for his leadership of the central bank’s response to the coronavirus pandemic.
“Look, you really see what people are made of in times of crisis and I think that Chairman Powell has really stepped up to the plate, and he’s done a lot of the right things to make sure that the market was able to get through the crisis,” Kushner said on CNBC’s “Squawk Box.”
“It was a lot great work by obviously the president, the Vice President [Mike Pence], Secretary Mnuchin and obviously Chairman Powell,” he said. “I think they’ve all worked very well together to, again, get the country through a very, very difficult period. Now we obviously are in a better place than we would have been, but the opportunity to go ahead is really going to be tremendous.”
MacDailyNews Take: On the news, and as the market digests it, the S&P 500, Dow 30, Nasdaq, and Russell 2000 are all up slightly and Apple’s share price is currently holding steady around $505.