Fed targets 2% average inflation and elevates focus on jobs

Wyoming

THE Federal Reserve on Thursday rolled out an aggressive new strategy to restore the United States to full employment and lift inflation back to healthier levels, in a world where it now believes that "downward risks to employment and inflation have increased".

Under the new approach, laid out in a fresh statement on the Fed's longer-run goals and monetary policy strategy approved by all 17 of its policymakers, the US central bank will seek to achieve inflation averaging 2 per cent over time, offsetting below-2 per cent periods with higher inflation "for some time", and to ensure employment does not fall short of its maximum level.

"Our revised statement reflects our appreciation for the benefits of a strong labour market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation," Fed chair Jerome Powell said in prepared remarks for a speech at the Fed's annual summer symposium, an event that is usually held in the mountain resort of Jackson Hole, Wyoming, but is being conducted virtually this year because of the pandemic.

His remarks followed a Labor Department report which showed one million people made new claims for jobless benefits in the week ended Aug 22, following an unexpected jump earlier.

A separate report also showed that the US economy's second-quarter contraction was slightly less steep than initially reported, a revision that offers little solace as the drop is still the worst since just after the Great Depression.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

With the US economy in a deep economic crisis and just months before a contentious election, the Fed's new approach is both an acknowledgment of fundamental changes in the economy that began well before the coronavirus pandemic, and a map for how the Fed plans to conduct policy in a world where weak growth, low inflation and low interest rates are seen as here to stay.

With tens of millions of people out of work because of the fallout from the pandemic and the campaign for the Nov 3 presidential election fast underway, the Fed's transformation of the way it manages monetary policy could result in it keeping rates lower for longer than previously expected, although the Fed made no explicit promises on that front.

After this week's event and the mid-September policy meeting, Fed officials will not meet again until the day after the election.

Mr Powell laid out a case for why low unemployment is a positive for the economy, especially for less-advantaged groups such as blacks.

"It is hard to overstate the benefits of sustaining a strong labour market, a key national goal that will require a range of policies in addition to supportive monetary policy," he said.

US stocks opened higher after Mr Powell's remarks with the Dow up 52.15 points at 28,384.07. The S&P 500 opened higher by 6.41 points while the Nasdaq gained 23.14 points. REUTERS, BLOOMBERG