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.

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Why it matters: Skepticism about the underlying data remains. But economists are still worried about the high level of Americans relying on some form of unemployment benefits, which is once again rising six months after the pandemic hit, even as the economy has reopened.

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