WSJ: The Federal Reserve is preparing to effectively abandon its strategy of pre-emptively lifting interest rates to head off higher inflation

by GloBoy54

www.wsj.com/articles/fed-weighs-abandoning-pre-emptive-rate-moves-to-curb-inflation-11596360600

The Federal Reserve is preparing to effectively abandon its strategy of pre-emptively lifting interest rates to head off higher inflation, a practice it has followed for more than three decades.

Instead, Fed officials would take a more relaxed view by allowing for periods in which inflation would run slightly above the central bank’s 2% target, to make up for past episodes in which inflation ran below the target.

“It would be a significant change in terms of how they are thinking about” the trade-off between employment and inflation, said Jan Hatzius of Goldman Sachs. “A lot of those things look very different now from the way they looked a few years ago,” he said.

Fed Chairman Jerome Powell hinted at the shift at a news conference last week when he said the central bank would soon conclude a comprehensive review of its policy-making strategy that began last year.

Mr. Powell initiated the review with an eye toward beefing up the Fed’s ability to counteract downturns in a world where interest rates are lower and more likely to remain pinned at zero.

Even before the severe shock from the coronavirus pandemic, the Fed had grown concerned about spells of low inflation that have bedeviled authorities in Japan over the past two decades and in Europe for the past decade.