Break down the Fed’s historic inflationary change

Today is a truly historic day in Fed history – one that will have a transformative effect on US monetary policy for the foreseeable future.

Read the news: For decades, the main task of central banks was to keep inflation down. The Fed has now effectively changed that policy, to give priority to maximum employment instead.

  • What they say: “After periods when inflation continues to fall below 2%, appropriate monetary policy is likely to aim to reach inflation above 2% for a while.”

Between the lines: Fed attitudes toward inflation have evolved steadily in recent years, as it stubbornly refused to pick up even during periods of full employment.

  • Today’s announcement marks the end of the Fed worried that employment could sometimes be too high.
  • For today, the Fed was charged with assessing “deviations” from maximum employment – either downward or downward. Now the Fed will only look at “deficits” of that level.
  • It’s a permit that an economy can never have too much employment.

The big picture: The biggest change is that as the Fed expected inflation, it no longer needs to raise the interest rate. Instead, it can wait and see if inflation actually comes, and only then act.

Go deeper: The Fed’s messages on this move are exemplary. There’s a simple and clear press release, a great speech by Jay Powell, a detailed policy statement, and then a collection of a dozen different papers that fill in all the details of the thinking that went into the new policy.

The bottom line: This news represents a radical change in how the Fed thinks about its job. It will deliver powerful ammunition if ECB President Christine Lagarde starts trying to make similar changes.