Lawmakers Offer Support for Fed's New Inflation Strategy
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
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
"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
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
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 email@example.com and Kate
Davidson at firstname.lastname@example.org
(END) Dow Jones Newswires
September 24, 2020 13:22 ET (17:22 GMT)
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