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Tim Duy

Fed's New Policy Approach Needs Some More Explaining

The central bank’s unwillingness to accelerate the pace of the recovery may at first glance appear disappointing.

Federal Reserve Chair Jerome Powell is not ready to tap the breaks. 

Federal Reserve Chair Jerome Powell is not ready to tap the breaks. 

Photographer: Bloomberg

It has only been three weeks since Federal Reserve Chair Jerome Powell unveiled a new approach to monetary policy, letting inflation and employment rates run higher and for longer than the central bank would have done in the past before pulling in the purse strings. And while the stock market has come off its highs since then, this new policy framework should prove positive for riskier financial assets over the longer term because it means the Fed will be much less inclined to prematurely get in the way of economic gains relative to past recoveries.

The Fed’s updated strategy places less importance on low unemployment rates as an indicator of future inflation, adopting instead an “average inflation targeting” framework. To be clear, the central bank has not actually implemented average inflation targeting as it has not defined any timeframe by which it will meet an average inflation rate of 2%. It is simply a mechanism that provides the Fed the flexibility to let inflation run above 2% by some unspecified magnitude for some unspecified time.