Policymakers have pledged to achieve 2% inflation since 2012, but will now tolerate overruns after moving to a “medium” target – allowing the economy to run faster and helping to support millions of jobs.
The move is the clearest signal to date to financial markets that interest rates will stay near zero for years to come, further fueling a stock market boom that has pushed the S&P 500 to new highs following the speech. Of the president. This could trigger calls for the Bank of England to follow suit.
The Fed has already cut interest rates close to zero and embarked on a $ 2 trillion printing program to counter the economic downfall triggered by Covid-19.
But Mr Powell’s online comments at the Jackson Hole Symposium that “proper monetary policy is likely to aim to achieve inflation just above 2% for a while” have been grabbed by investors.
Nigel Green, managing director of fund manager deVere Group, said: “This will fuel global equities which are already on fire. In this climate, holding bonds and sitting on cash simply will not provide the returns investors are looking for. In this context, many others will pile up more in the actions. ”
James Knightley, US economist at ING, said: “The Fed’s new language gives them the flexibility to let the economy run a little faster before considering raising interest rates.”
The central bank has also stepped up efforts to support the recovery in employment in the United States, with unemployment still standing at 10.2% following the virus.
Mr. Powell said the Fed “will focus heavily on promoting as strong a labor market as possible for the benefit of all Americans.”
Under its previous tenure, the Fed would hike rates if the labor market showed signs of overheating and wage increases began to snowball. But Mr Powell moved to a more relaxed stance after record unemployment failed to trigger inflation, while the central bank also recognized the benefits of a strong labor market for communities in low income.
Kathy Bostjancic, Oxford Economics, said: “Policymakers will be more concerned about the high unemployment rates than the low unemployment rates that previously raised concerns about a pick-up in inflation.
“Fed officials have been very concerned about the serious damage to the job market and the desire to quickly bring the unemployment rate back to its pre-Covid level.”
The scale of the US jobs crisis was underscored by figures showing that one million more workers applied for unemployment benefits last week.
More than 27 million Americans – nearly a tenth of the population – are clamoring for some form of advantage as the job recovery threatens to run out of steam. The economy contracted 9.1% in the second quarter.