We thought Federal Reserve Chairman Jerome Powell would be wary of declaring victory over inflation on Wednesday, but he was wary in formal declaration only. Everything else about his press conference after the latest Federal Open Market Committee (FOMC) meeting suggested that the Chairman’s Paul Volcker era is over. Easier money is on the way.
“The committee is proceeding carefully,” he said. The Fed still wants to see “ongoing progress” toward the Fed’s 2% inflation target, “we still have a ways to go,” and “no one is declaring victory” over inflation.
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On Thursday, July 23rd, 2020, Federal Reserve Chairman Jerome Powell made a notable shift regarding inflation in a keynote speech at the biennial symposium of the Federal Reserve Bank of Kansas City. Powell’s address was the latest in a series of measures taken by the Federal Reserve to respond to the economic crisis caused by the coronavirus pandemic.
Powell noted that central banks should allow inflation to exceed 2% during good economic times in order to make up for inevitable downturns. As a result, the Fed has adjusted its inflation rate goal from 2% to an average of 2%. Thus, it will allow inflation to exceed 2%, but it still aims to maintain a medium-term average of 2%.
The Fed chairman also noted that the new policy will be implemented gradually and that policy-makers are mindful of the risk of pricing pressures/inflation becoming too high. According to the new framework, the Fed will use asset purchases and keep interest rates near zero until it is confident that the economy is on track for full employment and that inflation is on track to moderately exceed 2%.
The purpose of the new policy is to ensure that the worst economic downturn since the Great Depression does not lead to a prolonged period of persistent low inflation or deflation. By allowing inflation to exceed the 2% goal temporarily, the Fed will be better able to combat future downturns and keep inflation under control in the long run.
In conclusion, punctuated by the powerful and heartsinking words of Chairman Powell, the Federal Reserve Bank of Kansas City’s keynote symposium has served as a catalyst for the birth of a new inflation framework. This new framework is designed to support the current economic recovery while also serving to protect against any future downturns.
