Via Economic Policy Journal

The Federal Open Market Committee has just announced that it has approved changes to its written policy strategy.

From the statement:

Following an extensive review that included numerous public events across the country, the Federal Open Market Committee (FOMC) on Thursday announced the unanimous approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates its approach to monetary policy and serves as the foundation for its policy actions. The updates reflect changes in the economy over the past decade and how policymakers are taking these changes into account in conducting monetary policy. The updated statement is also intended to enhance the transparency, accountability and effectiveness of monetary policy.

“The economy is always evolving, and the FOMC’s strategy for achieving its goals must adapt to meet the new challenges that arise,” said Federal Reserve Chair Jerome H. Powell. “Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation.”

Among the more significant changes to the framework document are:

  • On maximum employment, the FOMC emphasized that maximum employment is a broad-based and inclusive goal and reports that its policy decision will be informed by its “assessments of the shortfalls of employment from its maximum level.” The original document referred to “deviations from its maximum level.”
  • On price stability, the FOMC adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it “seeks to achieve inflation that averages 2 percent over time.” To this end, the revised statement states that “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”
  • The updates to the strategy statement explicitly acknowledge the challenges for monetary policy posed by a persistently low interest rate environment. Here in the United States and around the world, monetary policy interest rates are more likely to be constrained by their effective lower-bound than in the past.

In other words, the Fed is going to allow price inflation to “run hot,” really hot.

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The Fed had a bizarre target of 2% price inflation in the first place. But as Former Fed ChairmanPaul Volcker has put it, there is no sound justification for any price inflation target.

“I puzzle at the rationale,” Volcker wrote in his memoirKeeping At It: The Quest for Sound Money and Good Government “A 2 percent target, or limit, was not in my textbook years ago. I know of no theoretical justification.”

But now the Fed is moving beyond this target to an “average inflation target.” This will mean the Fed will allow price inflation to run above 2% to average inflation out.

Hug your gold coins.

More detailed analysis in the EPJ Daily Alert.

RW