Weekend Reading
2. The US Congress has given the Fed a mandate to aim for maximum employment and price stability. Federal Reserve Bank (Fed) Chairman Jerome Powell and the Federal Open Market Committee (FOMC) have conducted the first-ever public review of the monetary policy framework of USA. The review resulted in a revised Statement on Longer-Run Goals and Monetary Policy Strategy, a document that lays out the goals, articulates our framework for monetary policy, and serves as the foundation for the Federal Reserve’s policy actions.
In its recent statement the Fed decided on a strategy of “flexible form of average inflation targeting”(FAIT) which implies that when inflation undershoots the target for a time, then the FOMC will direct monetary policy to push inflation above the target for some time to compensate. With this new approach, the Fed hopes to anchor the expectations of financial markets and others that it can and will do what’s needed to get and maintain inflation at 2 percent on average over time.
Brookings Institute says that regarding its goal of sustaining maximum employment; the old statement said the Fed would adjust policy based on “deviations from its maximum level.” The new one says the Fed will base its decisions on “assessments of the shortfalls of employment from its maximum level.
The Fed is essentially saying it will not raise interest rates just because the projected unemployment falls below its estimate of the non-accelerating inflation rate of unemployment (NAIRU) unless there are signs of inflation increasing to unwelcome levels. In practice, this means that the FOMC will allow recoveries to go on unimpeded by monetary policy—even if unemployment rates get very low—as long as inflation remains subdued. This more inclusive definition of the employment mandate is thought to be especially beneficial to minority groups and low- and moderate-income communities. Research shows that these groups get disproportionate gains from very low unemployment rates.
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