Fed to allow for higher inflation

28 Aug 20

The US Federal Reserve has adopted a new monetary policy strategy, which will be more accommodating of temporary increases in inflation.

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US Federal Reserve ISTOCK

The US Federal Reserve. Asian policymakers said the monetary system should be more attentive to the ripple effect a policy change from major central banks like the Fed can have.

The announcement was made by the Federal Open Market Committee, following a review of the country’s economic position. 

Part of the Fed’s new approach involved moving to an average inflation target, which will allow the US central bank to go over its 2% target for inflation to compensate for lower inflation rates long-term.

A Fed briefing document said: “The revised statement states that following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time."

But the Fed said the central bank’s acceptance of higher inflation did have limits. Jerome Powell, chair of the Federal Reserve, said the overruns would be “moderate” and not extend over long periods of time.

The central bank has also outlined plans to adjust its view on how the labour market and the level of employment can be maintained without destabilising inflation rates.

Powell said: “The economy is always evolving, and the FOMC's strategy for achieving its goals must adapt to meet the new challenges that arise.

“Our revised statement reflects our appreciation for the benefits of a strong labour market, particularly for many in low and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation.”

In the fiscal year-to-date, the US government took in $2.8trn in revenue and spent $5.6trn, for a year-to-date deficit of just over $2.8trn, according to latest statistics from the US Treasury Department’s Bureau of the Fiscal Service.

Latest statistics from the US Government suggest that the country’s GDP contracted by 31.7% during the April to June quarter, the highest quarterly drop since records began in 1947

 

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