FOMC Updates Goals and Strategies

While Fed Chairman Jerome Powell was delivering his virtual speech to the virtual Jackson Hole Economic Symposium, the FOMC released its long-awaited changes in its approach to managing monetary policy. The most significant change will be in the way the Committee deals with managing inflation and inflationary expectations. Going forward, the Committee’s goal of 2% inflation will be viewed as the desirable level of inflation on average over time. This will enable our policy-makers to allow inflation to run above 2% following periods in which it failed to achieve 2%. The Committee first articulated its goal in 2012, but has had little success in achieving it. On average, the goal remains 2%. For investors, this means that they should not expect the Fed to become restrictive the moment 2% is attained. The new acronym for this approach is AIT: Average Inflation Targeting.

This change occurs while the Committee places more emphasis on achieving and maintaining full employment as Mr. Powell in his speech remarked upon how the Phillips Curve has flattened significantly in recent years. The dual-mandate has not gone away, but these changes seem to indicate the Committee’s greater concern of encouraging full employment along with an acknowledgement that fighting inflation is not the crusade it has traditionally been. Fighting deflation may be the new crusade. This morning’s statement also notes that both here and around the world, “monetary policy rates are more likely to be constrained by their effective lower-bound than in the past.”