Aug 27, 2020 - Economy

Fed lays out historic shift to inflation strategy

Fed chair Jerome Powell giving a statement in April

Photo: Federal Reserve via Getty Images

The Federal Reserve said Thursday that, going forward, it is willing to allow inflation to drift higher than its typical 2% target for periods of time — and won't be tempted to hike rates to offset rising prices when the unemployment rate gets too low.

Why it matters: It's a historic shift in the Fed's strategy. For decades, the central bank operated with the thinking that low unemployment rates lead to inflation. That never panned out during the record-long economic expansion that ended when the pandemic hit, as inflation has remained persistently below its target since the financial crisis .

  • Federal Reserve Chairman Jerome Powell made the announcement at the Fed's annual conference in Jackson Hole, held virtually for the first time.
  • "A robust job market can be sustained without causing an outbreak of inflation," Powell said.

Between the lines: The announcement may seem like it's coming at a strange time, when unemployment is the highest it's been in years. But it's the highly-anticipated result of a policy review the central bank announced it would do two years ago.

Go deeper