WASHINGTON—Federal Reserve Vice Chair Richard Clarida has provided an update on the Federal Open Market Committee's new strategy framework – adopted in August and reported by CUToday.info – to better reflect economic changes and monetary policy approaches.
Throughout the coronavirus pandemic, the Fed has made clear it will use every tool it has available and essentially further said there will be no limits on the liquidity it will make available as it responds to the coronavirus pandemic. During its August meeting, the FOMC updated its Statement on Longer-Run Goals and Monetary Policy Strategy, which NAFCU Chief Economist and Vice President of Research Curt Long said "looks to avoid the mistakes of the past."
The Changes
Under the updated statement, significant changes were made to:
- Maximum employment, which the FOMC emphasized that maximum employment is a broad-based and inclusive goal and reports that its policy decision will be informed by its "assessments of the shortfalls of employment from its maximum level
- Price stability, as the FOMC adjusted its strategy for achieving its longer-run inflation goal of 2% by noting that it "seeks to achieve inflation that averages 2% over time," adding that, to achieve it, "following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time”
- Explicitly acknowledge the challenges for monetary policy posed by a persistently low interest rate environment
The Steps Taken
At the FOMC's September meeting, the committee announced the Fed's plans to increase its holdings of Treasury securities and agency mortgage-backed securities in efforts to "sustain smooth market functioning and help foster accommodative financial conditions," and support the flow of credit to households and businesses. The committee cited the critical role the asset purchases are playing in economic recovery during its meeting earlier this month, NAFCU noted.
"Looking ahead, we will continue to monitor developments and assess how our ongoing asset purchases can best support achieving our maximum-employment and price-stability objectives," Clarida said.
He further indicated the Fed will likely keep rates lower than it otherwise might – even if it does eventually raise rates – to continue supporting the economy.
Inflation Direction
In terms of inflation, Clarida clarified the new framework "aims ex ante for inflation to average 2% over time, but it does not make a (time-inconsistent) commitment to achieve ex post inflation outcomes that average 2% under any and all circumstances and constellations of shocks.”