US Fed allows inflation to rise, won't raise interest rates

The US central bank has rolled out a major policy change that will let inflation rise to allow the economy to produce more jobs for the benefit of all workers, but especially lower-income families.

The change means inflation can stay above the 2.0 percent target "for some time" before the Fed will need to act by raising interest rates, Federal Reserve Chair Jerome Powell said on Thursday in a speech.

The aim is to correct the "shortfalls" in achieving the Fed's goal of maximum employment, and a recognition that with changes in the global economy, a tight job market does not necessarily drive prices higher.

"This change reflects our appreciation for the benefits of a strong labour market, particularly for many in low –– and moderate ––income communities," he said, adding that the Fed is prepared to use "our full range of tools to support the economy."

'Robust job market can be sustained'

Prior to the coronavirus pandemic the US unemployment rate had hovered near 50-year lows at 3.5 percent, which brought many people back into the workforce as firms struggled to fill open positions.

The policy shift, though telegraphed in recent statements, is a significant change for the Fed and central banking more generally, as inflation for decades has been the economic villain to be stamped out at every turn.

But Powell, in his speech to the annual Jackson Hole monetary policy conference, said the past 10 years since the 2008 global financial crisis has shown that warnings about low unemployment causing price hikes were exaggerated.

"This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation," he told the virtual conference.

'Still a healthy economy'

"There's is still a healthy economy under here, except for this area that's been directly affected by Covid," Powell said in a discussion as part of the Jackson Hole central banking conference.

But millions of workers in travel, hotels and restaurants have been directly impacted, which means "a couple of years of ... relatively high unemployment."

People in those industries are "really going to struggle to find work ... We need to support them."

Bank stocks climb

Inflation for years has stayed below the 2.0 percent target, and Powell said the goal now is "to achieve inflation that averages two percent over time" although he stressed that it will not be tied "to a particular mathematical formula."

Advocates of the new regime have argued the central bank needed to let the inflation rate drift higher to average 2.0 percent over the longer run.

World stocks moved in a tight range on Thursday, reserving judgement while bank stocks climbed on the news, with Citigroup and Bank of America up 1.9 percent and JPMorgan Chase up 2.5 percent.

Separate weekly data from the US Labor Department showed another million people filing claims in the week ended August 22, a drop from the week prior but still well above any single week of the global financial crisis 12 years ago.