Powellmay loosen the Fed’s stance on inflation
WASHINGTON— For decades, the Federal Reserve made clear its readiness to raise interest rates at the earliest signs of creeping inflation.
That was then. In a sign of how vastly the U.S. economic landscape has changed, Chairman Jerome Powell may be on the verge of sending a wholly different message this week: That the Fed plans to leave its key rate pinned near zero even after inflation has surpassed the central bank’s target level — at least for a while.
Behind the Fed’s new thinking is an ailing economy in the grip of a viral pandemic and a stubbornly lowinflation rate that has long defied the Fed’s efforts to raise it.
Today, Powell will address the Fed’s annual gathering of global central bankers, normally held in picturesque Jackson Hole, Wyoming, amid the towering Grand Teton mountain range but this time being conducted virtually. The conference is occurring just as the Fed is nearing the end of a comprehensive review of its monetary policy. While its conclusions may not be announced until the Fed holds its next meeting in September, Powell will likely preview its message in his speech today.
The widespread expectation is that the Fed is poised to adopt a more flexible policy that would allowinflation to overshoot its2% annual target for some period to compensate for themany years in which inflation has run below2%.
It’s called “average inflation targeting.” The goal would be to drive home to borrowers and investors that the Fed’s benchmark rate — which influences many consumer and business loans — will stay ultra-low for likely years to come. What’s new is themessage that the Fed is prepared to accept a level of inflation that in the past it would not have tolerated while keeping rates near record lows.
The Fed chairman is speaking at a perilous time. Unemployment is still in double digits, and roughly 1 million people are applying for jobless aid each week even as the amount of aid they receive has shrunk. Consumer confidence has tumbled. Though the stock market and home sales are surging, the economy is struggling to grow, and millions face potential evictions from their homes.
Against that backdrop, Powell may also discuss other options that the Fed and Congress could pursue. As he has before, the
chairman could press Congress to resolve its political impasse and expand upon the $3 trillion in aid it has provided to cushion the damage the pandemic has inflicted on households, school districts, small businesses and local and state governments.
“The Fed is in a positionwhere they see the recovery is losing momentum at a time when the economy is in a deep hole, and that is worrisome,” said Diane Swonk, chief economist at auditing firm Grant Thornton, who, like many analysts, says sheworries about a possible double-dip recession.
The chairman’s speech to an annual gathering of central bank officials is normally a hot ticket in the economic world, with coveted invitations going to a select few. This year, the event is being live-streamed to all on the YouTube site of the Federal Reserve Bank of Kansas City, which sponsors it.