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Investing.com -- The U.S. Federal Reserve officials are considering revising their current approach to monetary policy, according to the Fed chair, Jerome Powell. This reconsideration is due to recent experiences with inflation and the potential for more frequent supply shocks and associated price increases in the future.
Powell made these remarks at a two-day conference on Thursday, where the Fed’s current monetary policy approach, adopted in 2020, was under review. He emphasized that the economic environment has changed significantly since 2020, and the review will reflect their assessment of these changes.
Although Powell didn’t focus on the current monetary policy or economic outlook, he did mention that he expects April’s personal consumption expenditures price inflation to have fallen to 2.2%. This figure, while tepid, does not likely reflect the upcoming tariff-driven price increases. However, it does represent a "historically unusual result" of disinflation without major economic damage, a "soft landing" that occurred under the Fed’s current strategy.
The Fed had previously adjusted its approach five years ago to allow for lower unemployment rates and committed to using periods of high inflation to offset years where inflation was weak, a common occurrence from 2010 to 2019. However, the inflation surge after this period and the emerging state of the global economy suggests that this approach may need to be rethought, according to Powell.
Powell also indicated that the language around "shortfalls" of employment might need to be reconsidered. This term was adopted so that the Fed would not view a low unemployment rate as a sign of inflation risk in itself. Powell’s comments suggest potential revisions to a strategy that was seen as a significant shift for the Fed, with a willingness to take more risks for a stronger job market and tolerance for higher inflation after periods of weakness.
However, Powell noted that the idea of an intentional, moderate overshoot of inflation has not been relevant to their policy discussions and has remained so, following the near double-digit inflation that occurred during the pandemic reopening.
The Fed chair concluded by stating that the Committee is currently engaged in discussions about what they have learned from the past five years’ experiences. They plan to complete consideration of specific changes to the consensus statement in the coming months, with a particular focus on the 2020 changes.
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