FED: New Monetary Policy Statement Ends Flexible Average Inflation Targeting

Also in Fed Chair Powell's speech (link) is a discussion of the changes to the Federal Reserve's Statement on Longer-Run Goals and Monetary Policy Strategy as part of the latest framework review (the last was in 2020, when the economic landscape looked very different). There don't appear to be any major surprises, as the review's conclusions have been well-telegraphed - below are Powell's explanation of all of the major changes, and the reasoning behind them. Below, we include a graphic comparing the new to the previous Statement on Longer-Run Goals and Monetary Policy Strategy (the new statement is available here).

• "First, we removed language indicating that the [effective lower bound of interest rates] was a defining feature of the economic landscape. Instead, we noted that our "monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions." The difficulty of operating near the ELB remains a potential concern, but it is not our primary focus. The revised statement reiterates that the Committee is prepared to use its full range of tools to achieve its maximum-employment and price-stability goals, particularly if the federal funds rate is constrained by the ELB."
• "Second, we returned to a framework of flexible inflation targeting and eliminated the "makeup" strategy. As it turned out, the idea of an intentional, moderate inflation overshoot had proved irrelevant. There was nothing intentional or moderate about the inflation that arrived a few months after we announced our 2020 changes to the consensus statement, as I acknowledged publicly in 2021." [Re the previous "FAIT" framework, Powell says: in 2020 "we adopted flexible average inflation targeting—a "makeup" strategy to ensure that inflation expectations would remain well anchored even with the ELB constraint. In particular, we said that, following periods when inflation had been running persistently below 2 percent, appropriate monetary policy would likely aim to achieve inflation moderately above 2 percent for some time.""]
• "Third, our 2020 statement said that we would mitigate "shortfalls," rather than "deviations," from maximum employment...Instead, the revised document now states more precisely that "the Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability." Of course, preemptive action would likely be warranted if tightness in the labor market or other factors pose risks to price stability."
• "Fourth, consistent with the removal of "shortfalls," we made changes to clarify our approach in periods when our employment and inflation objectives are not complementary. In those circumstances, we will follow a balanced approach in promoting them. The revised statement now more closely aligns with the original 2012 language. "