Jerome Powell inflation, Powell's Fed Shifts to More Relaxed Approach to Fight

 Jerome Powell inflation, Powell's Fed Shifts to More Relaxed Approach to Fight.

Federal Reserve Chair Jerome Powell unveiled a new approach to setting U.S. monetary policy, letting inflation and employment run higher in a shift that will likely keep interest rates low for years to come.

Following a more than year-long review, Powell said the Fed will seek inflation that averages 2% over time, a step that implies allowing for price pressures to overshoot after periods of weakness. It also adjusted its view of full employment to allow labor-market gains to reach more workers.

“Maximum employment is a broad-based and inclusive goal,” Powell said Thursday in a speech delivered virtually for the central bank’s annual policy symposium traditionally held in Jackson Hole, Wyoming. “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”

During the longest U.S. economic expansion on record until the pandemic hit earlier this year, many groups benefited -- including minorities and women -- in their ability to find work. With unrest breaking out across the U.S. over racial inequality, questions about how the Fed’s policy helps communities broadly have been raised.

“They really, really, really are not going to be raising interest rates any time soon,” said James Knightley, chief international economist at ING Financial Markets. “The Fed is saying rates will be lower for longer, but don’t worry inflation is not going to be picking up.”

Price Pressures

In its new statement on longer-run goals, the Fed said its decisions would be informed by its assessment of “shortfalls of employment from its maximum level.” The previous version had referred to “deviations from its maximum level.” The change de-emphasizes previous concerns that low unemployment can cause excess inflation.

While expected, the announcement of the strategy shift came sooner than some thought. After first fluctuating on the news, U.S. stocks resumed their record-breaking rally and the Treasury yield curve steepened to the widest in two months as traders bet policy rates will remain locked near zero for even longer.