Monetary policy overhaul will more effectively boost employment and stabilize inflation, New York Fed president says

Reuters

  • The Federal Reserve’s new policy framework will help it achieve maximum employment and stable price growth more efficiently, John Williams, president of the Federal Reserve Bank of New York, said Wednesday.
  • The central bank’s plan targets inflation that averages 2% over time and maximum employment, particularly in low- and middle-income communities.
  • The updated strategy “will meaningfully improve our ability to achieve both of our dual mandate goals in an environment of a very low neutral rate,” Williams said in prepared remarks.
  • The framework also improves the Fed’s ability to hit its targets despite persistent near-zero interest rates, Williams said.
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The Federal Reserve’s updated monetary policy framework will improve the central bank’s ability to reach its inflation target and combat unemployment, John Williams, president of the Federal Reserve Bank of New York, said Wednesday.

The Fed shifted its policy strategy last week, introducing a new inflation-rate goal and significantly changing its approach toward driving employment. Where the monetary authority previously viewed a robust labor market as a precursor to unwelcome inflation, the central bank’s new outlook signals it will be more relaxed in controlling price growth while unemployment sits at historic lows.

The Fed’s new plan “represents both an important evolution in our thinking about how to achieve our goals and another step toward greater transparency,” Williams said in prepared remarks, adding the framework “positions us for success in achieving our maximum employment and price stability goals in the future.”

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Possibly the biggest single change to the Fed’s strategy is its plan to target an inflation rate that averages 2% over time, instead of a flat 2% target. The change will allow for the central bank to guide for periods of inflation greater than 2% following a time of below-target price growth.

The Fed also aims to reach maximum employment and eliminate barriers for job access in low- and middle-income communities.

“These changes are mutually reinforcing and will meaningfully improve our ability to achieve both of our dual mandate goals in an environment of a very low neutral rate,” Williams said.

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That low neutral rate presents a significant hurdle for the central bank. Cutting the Fed’s benchmark interest rate to near-zero at the start of the coronavirus crisis forced it to create new relief policies throughout the pandemic. Policymakers expect the historically low rates to persist through 2022, and frozen interest rates cut away at the Fed’s ability to guide inflation.

The central bank’s overhauled framework “directly and effectively addresses the problems caused by a low neutral rate and persistently low inflation,” Williams said. Allowing for inflation-rate overshoots can keep price growth closer to desired levels for longer, he added.

Investors will get their next look at Fed guidance after the Federal Open Market Committee’s September 15 to 16 meeting. Chairman Jerome Powell has indicated the central bank is far from even thinking of raising interest rates, but new commentary around permitting inflation higher than 2% could reveal how the Fed sees the US economic recovery moving forward.

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