Change in Strategy of the Fed

 The Federal Reserve 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.

 This is 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.

 Fed’s review was spurred by four key developments in the economy in recent years:

 Slower economic growth: Since 2012, Fed officials’ median estimate of the economy’s potential
annual growth has fallen to 1.8% from 2.5%. There are several forces, including slowing population
growth, an aging population and sluggish productivity growth.

 Lower interest rates: The Fed’s “neutral federal funds rate” – consistent with a strong economy and
stable inflation – has fallen from 4.25% to 2.5%. That’s a problem because a low long-run rate
means the Fed “has less scope to support the economy during an economic downturn by simply
cutting the federal funds rate.

 The result can be worse economic outcomes in terms of both employment and price stability, with
the cost of such outcomes likely falling hardest on those least able to bear them.

 A robust labor market before the pandemic: The record 10.5 year old expansion that was abruptly
halted by the pandemic “led to the best labor market we had seen in some time,” Powell said.
Besides unemployment that hovered near 50-year lows for about two years, a larger-than-expected
share of Americans were working or looking for jobs despite massive baby boomer retirements. And
black and Hispanic unemployment rates had reached record lows.

 Stubbornly low inflation: The strong labor market did not trigger a significant rise in inflation.
Typically, low unemployment leads to higher inflation as employers bid up wages to attract a
smaller pool of workers. But that hasn’t happened. The Fed’s estimate of the jobless rate that’s likely
to begin pushing inflation higher has fallen to 4.1% from 5.5%.

Reference: https://www.livemint.com/news/world/fed-to-allow-inflation-to-rise-to-maximize-job-
growth-jerome-powell-11598534698018.html