The revised monetary policy strategy of the Fed

Against the backdrop of the Covid-19 pandemic and the extraordinary monetary policy measures to stabilize the economy and the financial system, it has almost been forgotten that the U.S. Federal Reserve Bank (Fed) has been in the process of rethinking its monetary policy strategy. On August 27, the Fed published its revised monetary policy strategy. The revised strategy has effects on the Fed’s approach to inflation. The target itself, long-run inflation of two percent – measured by the index for personal consumption expenditures – remains the same. However, the Fed now commits itself to accepting larger deviations in the future and, in particular, targeting the two percent target as the medium-term average. This would mean that a year-long undershoot of the inflation target – as was the case in previous years, would in the future be compensated for by a temporary overshoot.

I think a reform in this direction is good. In recent years it has become clear that central banks seem to find it more difficult to precisely influence inflation. Perhaps this is due to globalization and technological change – at the moment, these real factors may have a greater impact on inflation than monetary policy. I write “presently” – so it does not have to be that this is the case forever. In a situation like this, it is right not to believe that inflation can be precisely controlled. It has been my opinion in the past that it might be useful if the Fed communicated more strongly that inflation within a certain range moderately above or below two percent is compatible with its mandate.

The Federal Reserve revised its monetary policy strategy and adopts “average inflation targeting”. The target inflation rate is still two percent:

https://www.reuters.com/article/us-usa-fed-jacksonhole/in-landmark-shift-fed-rewrites-approach-to-inflation-labor-market-idUSKBN25N0HM

And here is the event and the video where Jay Powell made the announcement:

https://www.kansascityfed.org/publications/research/escp/symposiums/escp-2020

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