The U.S. Federal Reserve is adopting a new strategy for carrying out monetary policy that will see the central bank keep short-term interest rates near zero for five years or longer.
The new approach, which is likely to be unveiled in September, will see policy makers take a more relaxed view toward inflation, even welcoming a temporary rise above their 2% target.
Federal Reserve Chairman Jerome Powell will provide an update on the central bank’s review of its policies and practices when he speaks on Thursday at the central bank’s Jackson Hole, Wyoming conference, which is being held virtually this year because of the pandemic.
Under the new regime, the Fed is expected to seek an inflation rate that roughly averages 2% over time. So, a modest rise in inflation above target would be welcomed. The central bank is also expected to codify a change in its approach toward achieving full employment. In the past, officials shied away from pushing joblessness below what was considered its long-run natural rate out of concern that would lead to rapid inflation.
At their June meeting, all 17 Fed policy makers projected that the federal funds rate they target would remain near zero this year and in 2021. And all but two saw rates staying at that level in 2022. Officials will provide updated quarterly forecasts at their meeting next month, including the first projections for 2023.
The Fed held rates near zero for seven years during and after the 2007-09 financial crisis before raising them in December 2015. In the last decade, it took more than three years for inflation-adjusted gross domestic product to rise back to the level that prevailed before the financial crisis.
