The Fed’s New Monetary Policy Is Not That New
For the most part, it describes what the central bank was already doing.
It might not last a decade.
Photographer: Daniel Acker/Bloomberg
The Federal Reserve’s long-awaited revision of its monetary policy — the fruit of nearly two years’ discussion and reflection — takes a small step at the modest end of the changes the Fed was weighing. This is understandable. Central bankers rightly prize stability and by nature frown on radicalism. In due course, though, the Fed might find it necessary to go further.
Chairman Jerome Powell’s speech Thursday on the subject crisply summarized the difficulties monetary policy has to face in a “new normal” of slower long-term growth and persistently low interest rates. Once the policy rate has fallen to its effective lower bound (zero or perhaps a bit less), it can’t be cut any further, even though the economy might still need a monetary push. Buying bonds on an enormous scale can help, but there are drawbacks. The Fed’s challenge, in effect, becomes one of convincing financial markets that if inflation settles below target, the policy rate will be held low for longer than investors would otherwise have expected.