Federal Reserve Makes Major Change to Inflation Policy

The Federal Reserve has struggled for more than a decade to get inflation up to their 2% target, which they see as consistent with a growing economy and that allows policymakers with enough room for times of economic stress. Inflation persistently has run a bit below the 2% target for most of the period since the Great Recession and has fallen closer to 1% during the Covid-19 downturn. On Thursday (8/27) Federal Reserve Chairman Jerome Powell announced a major change in the Fed’s inflation policy. Going forward  policymakers will allow inflation to run modestly higher for periods of time, rather than employ the past practice of using preemptive rate hikes to control price pressures. The new practice is known as “average inflation targeting.” When hearing the news, the stock markets rallied. As investors believe that the approach would keep short-term rates anchored near zero well into the future. However, there also was plenty of skepticism from various economic experts on whether the Fed would be able to reach its goal.

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Next up for the Federal Reserve: Convincing the markets it can do what it says it will do