Major Changes At The Federal Reserve: Powell Changes His Stance On Inflation And Employment

Federal Reserve Chairman Jerome Powell gave his annual speech at Jackson Hole and announced a major policy shift on Thursday with respect to how the Fed will tackle inflation and employment. Remember, the Fed has a dual mandate: “To foster economic conditions that achieve both stable prices and maximum sustainable employment.” Put simply, the Fed is responsible for making sure inflation stays around 2% and the employment situation stays relatively healthy.

Inflation: Average Inflation Targeting

In the “old” days, the Fed had an inflation target of 2% and if inflation rose above that level it would raise rates to lower inflation. Now, in the new approach, the Fed will let inflation run higher than the standard 2% target before hiking interest rates. That’s a major change which means the Fed can keep rates lower for much longer. The Fed will use an “average inflation target” instead of a hard 2% target.

Employment: Focus On Lower Paying Jobs

In addition to changing its stance on inflation, the Fed also changed its approach to employment so it can focus on the lower paying jobs.

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What Does This Mean For Interest Rates?

The big policy shift gives the Fed more room to keep rates lower for a much longer period of time. Under the new approach, the Fed will not have to raise rates when the unemployment rate falls, as long as inflation does not shoot higher. In the old days, if inflation passed 2% the Fed would be “pressured” to raise rates.

Under the new measures, that pressure is gone and the Fed can basically keep printing for as long as it wants. So for the easy money folks out there this is a big win for more “easy money.” Stock futures erased their losses and turned higher on the news.

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