The Federal Reserve on Thursday adopted an innovative new strategy to return the United States to full employment, besides planning to raise inflation back to healthy levels. These new developments come at a time where low inflation and interest rates, coupled with sluggish economic growth, are persisting.
The new strategy laid out by the Fed received support from all 17 policymakers. Within the plan, the US central bank would endeavor to achieve an inflation average of 2% over time.
The press release also aims to guarantee that work does not fall short of a “broad-based and equitable target” of maximum employment. It also includes a reference to racial equity and its role in fostering economic development.
Federal reserve reforms
The reforms also accept that “downside risks to jobs and inflation have risen.”
It also includes a new goal to use the “full range of tools” from the central bank to stabilize prices and build a strong labor market.
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According to the Fed chair, Jerome Powell: “Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome rise in inflation.”
“It is hard to overstate the benefits of sustaining a strong labor market,” he said. He added that It is “a key national goal that will require a range of policies.”
Effect of the pandemic
Tens of millions of people out of work as a result of the pandemic. And the US economy is in a severe economic crisis. Also, the US is months away from a divisive referendum. The Fed’s new approach is both a recognition of profound economic changes that occurred well before the coronavirus pandemic. It is also a map of how the Fed aims to execute policies in the current economic climate.
The restructuring of the Fed’s way of managing monetary policy could result in it maintaining lower rates for longer than initially anticipated. However, the Fed made no clear commitment. Indeed Powell said that an elaborate mathematical formula would not determine the Fed’s new strategy to inflation.
