Fed’s Powell unveils plan to let inflation heat up a bit

The Federal Reserve on Thursday adopted a historic shift in its approach to interest-rate policy that places more emphasis on boosting employment and allows inflation to rise above the Fed’s 2% target during economic expansions, keeping rates lower for longer.

In the current COVID-19-induced economic downturn, the new, long-awaited policy likely would keep rates near zero for several more years, economists have said.

“Forty ago the biggest problem our economy faced was high and rising inflation,” Fed Chair Jerome Powell said in the text of a speech he plans to deliver at 9:10 a.m. ET to kick off the Fed’s annual conference in Jackson hole, Wyoming. The symposium is being conducted virtually this year because of the pandemic.

Now, however, Fed officials have become convinced that “a robust job market can be sustained without causing an outbreak of inflation,” Powell said.

The sweeping changes are rooted in an economy that has been growing more slowly in recent years and inflation that has remained stubbornly below the Fed’s 2% target despite an unemployment rate that fell to a 50-year low of 3.5% before the pandemic.

Under the new policy, the Fed would target inflation that averages 2% over time. As a result, if inflation undershoots the Fed’s target, as it has for most of the past decade, the Fed would allow inflation to run “moderately above 2% for some time,” Powell said.

That’s significant because persistently low inflation leads consumers and businesses to expect it to continue, perpetuating a cycle of meager price increases. If workers, for example, expect prices to remain stable, they’re less likely to seek solid wage increases.Low inflation can lead to deflation, or falling prices, that may prompt consumers to put off purchases, hurting the economy.

Also, Powell said, paltry inflation typically prompts very low interest rates, giving the Fed less ability to cut rates if the economy turns south.

The Fed announced its new monetary policy framework after an 18-month review and nationwide events with employee groups, unions, small business owners and residents of low and moderate income communities, among other constituencies.

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