The Fed's New Policy Framework in Action

Chief Economist Scott Brown discusses current economic conditions.

There were no significant surprises following the September 15-16 Federal Open Market Committee meeting. As expected, short-term interest rates were left unchanged and the FOMC did not alter its asset purchase plans. In the Summary of Economic Projections, Fed officials’ projections of growth, unemployment, and inflation were within the range of private-sector economic forecasters, showing a smaller hit to GDP this year, but somewhat slower growth in the next couple of years. The forecast horizon was extended, and most Fed officials (14 of 17) expect no change in rates through 2023. The FOMC incorporated its revised policy framework into the policy statement, but Powell was vague about how it will actually work.

Recall that the Fed’s revised policy framework altered how the Fed views its inflation and employment goals. The Fed has formally adopted a flexible average inflation targeting program. If inflation runs below 2% from some period, the Fed will try to achieve inflation above 2% for some time. The “flexible” qualifier means that there is no mathematical formula or rule. The Fed will use its judgment.

According to the FOMC policy statement: “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.”

In his post-FOMC press conference, Chair Powell clarified that “with regard to interest rates, we now indicate that we expect it will be appropriate to maintain the current 0 to 1/4 percent target range for the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”