Fed Updates Monetary Policy in Response to Low Inflation, Employment Trends

The Federal Open Market Committee today revised its monetary policy statement and long-run goals to reflect the challenges of operating in a persistent low-rate, low-inflation environment. The new statement keeps the Fed “highly focused on fostering as strong a labor market as possible for the benefit of all Americans,” Fed Chairman Jerome Powell said today, as well as maintaining its 2% inflation target over time.

Based on the evidence of the past several years, the new statement reflects the Fed’s view that “a robust job market can be sustained without causing an outbreak of inflation,” Powell said. “Going forward, employment can run at or above real-time estimates of its maximum level without causing concern, unless accompanied by signs of unwanted increases in inflation or the emergence of other risks that could impede the attainment of our goals.”

The statement also emphasizes that the Fed will “seek to achieve inflation that averages 2% over time,” Powell added. “Following periods when inflation has been running below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time.”

Finally, “our new statement explicitly acknowledges the challenges posed by the proximity of interest rates to the effective lower bound,” Powell said. “By reducing our scope to support the economy by cutting interest rates, the lower bound increases downward risks to employment and inflation. To counter these risks, we are prepared to use our full range of tools to support the economy.”