Inflation Strategy

While Fed Chair Jerome Powell looks like he’s giving James Bond instructions for a new mission, we can assure you he is talking about a much more exciting topic: monetary policy.

In a keynote address at the Fed’s annual policy symposium, Powell revealed a major update to the central bank’s basic framework for steering the economy through good times and bad.

The update: The Fed now wants inflation (the rise in prices) to run at a 2% average, rather than a concrete bullseye it needs to hit. That means it will be comfortable with inflation climbing above 2%, a prospect that at one point would scare the bejesus out of central bankers.

The reason behind the shift: Powell and his pals thought that historically low unemployment—like the kind we had in 2019—would push up prices and cause higher inflation, but...that never happened. Inflation consistently came in below the 2% target despite pretty much everyone having a job.

The new change, in Powell’s words, “reflects our view that a robust job market can be sustained without causing an outbreak of inflation.”

What it means for you

The Fed typically hikes interest rates when it’s worried inflation might run too hot. But as we mentioned, it just kissed those worries goodbye.

That means interest rates, which the Fed dropped to near-zero in the early days of the pandemic, could stay really low for a really long time. The Fed’s benchmark interest rate sets the standard for borrowing costs across the economy, influencing everything from mortgages to the yield on your savings account. So whenever you lock in a super low rate on your home loan or earn $1 in interest over the next year, just say “Thanks, Jerome.”