Powell Announces Latest Adjustments to Monetary Policy Framework, Employment and Inflation Response Strategies Become More Flexible
On August 22, Jin Shi Data reported that Federal Reserve Chairman Powell announced the latest adjustments to the Federal Reserve's monetary policy framework, a strategic document that guides the Fed's long-term decision-making. This includes clarifying a pivot from 2020, whereby officials will not raise interest rates prematurely to prevent inflation due to a low unemployment rate. He stated that decision-makers still agree that there is no need to raise interest rates solely based on estimates of the long-term unemployment rate level. However, the 2020 revision "was never intended to permanently forgo the ability to preemptively raise rates when the labor market is strong." In the latest adjustment, officials removed the previous statement "decisions will be based on assessments of employment below maximum levels" and replaced it with "employment may at times be above real-time assessments of maximum employment levels, but it does not necessarily pose a risk to price stability." This indicates a decreased tolerance for an overheating labor market while retaining the Fed's policy flexibility. "If the labor market is tight or other factors pose a risk to price stability, taking preemptive action may be necessary," Powell said.
