JAKARTA (TheInsiderStories) – Chairman of Federal Reserves (Fed), Jerome Powell, told the audiences of Jackson Hall Symposiums the central bank to keep the lower interest rate policy for a longer period and avoid the negative rate. The policymakers also shift an inflation goal and changed their views on the trade-off between lower unemployment and higher inflation.
“With the ever-changing economy, future reviews will allow us to take a step back, reflect on what we have learned, and adapt our practices as we strive to achieve our dual-mandate goals,” he said on Thursday (08/28).
He explained, for the past year and a half, the Federal Open Market Committee (FOMC) have been conducting the first-ever public review of the monetary policy framework. Because the economy is always evolving, the committee’ strategy for achieving its goals must adapt to meet the new challenges that arise, he adds.
Powell revealed, by the early 2000s, many central banks around the world had adopted a monetary policy framework known as inflation targeting. The inflation-targeting central banks generally do not focus solely on inflation but with “flexible” inflation targets take into account economic stabilization in addition to their inflation objective.
Under Ben Bernanke’ leadership, the central bank adopted many of the features associated with flexible inflation targeting. Now, the persistent undershoot of inflation from its 2 percent longer-run objective is a cause for concern. Many find it counterintuitive that the Fed would want to push up inflation.
“After all, low and stable inflation is essential for a well-functioning economy. However, inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations,” he noted.
If the inflation expectations fall below our 2 percent objective, interest rates would decline in tandem. In turn, the Bank would have less scope to cut interest rates to boost employment during an economic downturn, further diminishing our capacity to stabilize the economy through cutting interest rates.
He added, “We have seen this adverse dynamic play out in other major economies around the world and have learned that once it sets in, it can be very difficult to overcome. We want to do what we can to prevent such a dynamic from happening here.”
The committee, said Powell, explored the range of issues that were brought to light during the course of the review in five consecutive meetings beginning in July 2019. The plans to conclude the review earlier this year were, like so many things, delayed by the arrival of the pandemic.
He ensured that the policymakers always have a diverse range of perspectives on monetary policy, and that is certainly the case today. In addition, the FOMC have not changed their view that a longer-run inflation rate of 2 percent is most consistent with their mandate to promote both maximum employment and price stability.
“Finally, we continue to believe that monetary policy must be forward looking, taking into account the expectations of households and businesses and the lags in monetary policy’ effect on the economy. Thus, our policy actions continue to depend on the economic outlook as well as the risks to the outlook, including potential risks to the financial system that could impede the attainment of our goals,” he said.
The key innovations, said the governor, reflect the changes in the economy. The Fed new statement explicitly acknowledges the challenges posed by the proximity of interest rates to the effective lower bound. By reducing the scope to support the economy by cutting interest rates, the lower bound increases downward risks to employment and inflation.
“To counter these risks, we are prepared to use our full range of tools to support the economy. With regard to the employment side of our mandate, our revised statement emphasizes that maximum employment is a broad-based and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.,” Powell stated.
In addition, the Bank revised statement says that the policy decision will be informed by our “assessments of the shortfalls of employment from its maximum level” rather than by “deviations from its maximum level” as in our previous statement. This change may appear subtle, but it reflects the committee view that a robust job market can be sustained without causing an outbreak of inflation.
The Fed also made important changes with regard to the price-stability side. Their longer-run goal continues to be an inflation rate of 2 percent. However, if inflation runs below 2 percent following economic downturns, then over time, inflation will average less than 2 percent.
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