Breaking the Fed’s historic inflation shift

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Today is a truly historic day in the history of the Fed – a day that will have a transformative effect on US monetary policy for the foreseeable future.Driving the news: For decades, the main task of central banks has been to contain inflation. The Fed has now effectively changed this policy, instead prioritizing maximum employment.

  • What they say: “After periods where inflation has been consistently below 2%, an appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time. “

Between the lines: The Fed’s attitudes towards inflation have evolved steadily in recent years, as it has stubbornly refused to wiggle even during periods of full employment.

  • Today’s announcement marks the end of the Fed fearing that employment is sometimes too high.
  • Before today, the Fed has been tasked with assessing “deviations” from maximum employment – either up or down. From now on, the Fed will only be interested in “deficits” from this level.
  • It’s an admission that an economy can never have too many jobs.

The big picture: The biggest change is that if the Fed attend inflation, he no longer needs to raise interest rates. Instead, he can wait and see if inflation really happens and only act then.

Go further: The Fed’s message around this decision is exemplary. There is a simple and clear press release, a major speech by Jay Powell, a detailed policy statement, and then a collection of a dozen different documents, all of which complement the details of the thinking that followed the new policy.

The bottom line: This news represents a sea change in the way the Fed views its work. It will provide powerful ammunition if ECB President Christine Lagarde wishes to start trying to make similar changes.

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