New York (CNN Business)The Federal Reserve is stepping up its quest to prevent the United States from tumbling into a spiral of falling prices that is difficult to escape from.
The new strategy, laid out in a speech by Fed chief Jerome Powell, declares that the central bank will now seek to achieve inflation that average 2% over time.
That means after periods of low-inflation — such as the dozen years following the Great Recession — the Fed will allow inflation to run hot by climbing above 2%.
The Fed is once again signaling that it won’t be in a rush to lift interest rates off the basement — even if inflation starts to pick up as the United States recovers from the pandemic.
The shifts underscore the Fed’s fears of tumbling into a deflationary spiral of ever-lower inflation like what Japan has experienced. Central banks have struggled to reverse such cycles. It is especially difficult to recover from deflation when interest rates are already at zero like they are today in the United States.
“Inflation that is persistently too low can pose serious risks to the economy,” Powell said in the speech.
At the same time, the Fed is making new efforts to target America’s inequality problem. The gap between rich and poor has widened in recent decades — a problem that threatens to lead to periods of instability.
The Fed’s new strategy emphasizes that its mandate to achieve maximum employment is a “broad-based and inclusive goal.”
“This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities,” Powell said.
The Fed also said its decisions will be based on fixing “shortfalls of employment from its maximum level.”
The new strategy highlights a realization among many economists that, because of aging demographics and other factors, the United States can enjoy both low unemployment and muted inflation. They point to the 50-year low in unemployment prior to the pandemic that coincided with low inflation.
“This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation,” Powell said.
The makeover to the Fed’s strategy is being closely watched by Wall Street because the central bank’s tactics have a huge impact on financial markets.
The Fed’s easy money policies during the pandemic have set off a boom in the stock market, which is at record highs. Some critics worry the Fed is inadvertently inflating stock prices to unsustainable levels.