August 31, 2020 — The Fed Approves New Strategy for Interest Rate Changes


The Fed has dropped its longstanding practice of pre-emptively raising interest rates to control inflation, which will likely leave borrowing costs very low for a long time.  The change will not affect current policy, as the practice has been used without being formally defined. 

Fed Chairman Powell spoke at the Jackson Hole economic conference which was held virtually this year. The change in policy is designed to address the “reality of a quite difficult macroeconomic context of low interest rates, low inflation, relatively low productivity, slow growth and those kinds of things.” He further said, “We’ve really got to work to find every scrap of leverage in helping stabilize the economy.”

Decisions to raise interest rates would be guided by a desire to avoid shortfalls of employment from its maximum level, rather than all deviations above or below the maximum level.    The change will increase the accommodative power of policy, with markets expecting a longer period of easier policy, which will, in turn, increase the amount of effective stimulus. It reflects the Fed’s view that a robust job market can be sustained without causing an outbreak of inflation.

The Fed is expected to provide more details on how long it expects interest rates to remain low at their September 15-16 meeting. This will be indicated by the inflation threshold and a description of labor market conditions warranting higher rates.