Another dovish shift from the Fed was that it would now consider ‘shortfalls of employment from its maximum level’ rather than ‘deviations from its maximum level’ when setting intereast rates. This means that it will not necessarily begin raising interest rates to a level that it considers consistent with full employment. The Fed defines around 4% of the labour market as the market being in a state of “full employment”, with current US unemployment rate still above 10%.
The Federal Reserve announced a major change in strategy as the US central bank found itself largely missing its 2% inflation goal since it began targeting a 2% rate from 2012. Instead of aiming for inflation to hit 2%, it will now aim to see inflation average 2% over time.
“Following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time,” announced the Federal Reserve on 27 August 2020, updating its Statement on Longer-Run Goals and Monetary Policy Strategy.
