By Nick Timiraos and Kate Davidson 

The Federal Reserve last month changed the way it will implement its mandate from Congress, and lawmakers have no objection.

Over three days of congressional hearings this week that concluded Thursday, Fed Chairman Jerome Powell received some accolades -- and not a word of concern -- from lawmakers about the central bank's formal decision to seek periods of higher inflation to compensate for periods of lower inflation.

Mr. Powell also said Thursday he didn't see a need to change the central bank's mandate to add a new focus on racial equality because the Fed is already doing what a new proposal would require.

Congress assigns two broad goals to the Fed -- to maintain stable prices and to secure full employment -- but it leaves it up to the central bank how to achieve those goals.

The Fed's new strategy represents the biggest change to its operating framework since 2012, when the central bank adopted a 2% inflation target to define the first part of its mandate. The initial inflation target drew significant concerns from lawmakers on both sides of the aisle for years leading up to its adoption. The Fed didn't seek formal approval from Congress for either the initial target or the latest change.

Lawmakers who have in the past raised concerns about allowing higher inflation didn't press Mr. Powell over the changes or raise any objections this week, while others offered their compliments.

"I am not at all exaggerating when I say this new framework is the most important thing that has happened to monetary policy -- indeed, in economic policy -- in 40 years," Rep. Denny Heck (D., Wash.) said on Tuesday.

The changes are "great news," said Rep. Trey Hollingsworth (R., Ind.). "I really appreciate you doing that and I think it's going to be a positive for the Fed and for the American economy going forward."

The new policy highlights a deficiency the Fed's old one confronted in a world with more frequent or extended episodes in which interest rates can't be lowered once falling to near zero. If the central bank targets 2% inflation and consistently falls short, expectations of future inflation will slide, making it much harder to achieve the target.

The new framework codifies two important changes. First, it effectively raises the Fed's inflation target by saying the central bank should take past misses of the 2% target into account and seek periods of moderately higher inflation to compensate.

Second, officials won't raise interest rates simply because unemployment rates fall below a level estimated to put pressure on prices. In doing so, they have set aside the consensus that guided central bank policy following the runaway inflation of the 1970s.

Sen. Elizabeth Warren (D., Mass.) lauded Mr. Powell's push for the change as a "good first step" by pointing to how Black unemployment rates tend to be first to rise in downturns and last to fall in expansions. "The Fed shouldn't slow economic stimulus before Black workers see real economic gains," she said.

Ms. Warren introduced legislation last month that would tweak the Fed's mandate to require the central bank to document racial disparities in the economy and explain how the Fed's authorities are combating those disparities. The bill would also require the Fed to include in its twice-yearly report to Congress more reporting on disparities in workforce trends.

Mr. Powell said the Fed has already developed a "quite broad set of efforts" to report on racial inequality via data collection and research. "I don't really think you need to change the law to get us to do this," he said. "We're doing it already."

Write to Nick Timiraos at nick.timiraos@wsj.com and Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

September 24, 2020 13:22 ET (17:22 GMT)

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