Powell speaking at the Jackson Hole just revealed the FED´s new monetary framework. As expected, it is based on averaging inflation targeting (see my tweet ) without indicating a precise number of years to do the averaging. Some discretion is warranted.1/n
Yield curve control or indexed forward guidance are obviously out, again as expected. The new targeting basically allows (and promises) inflation running above the average target if it has been below it for a number of years. This is particularly important at this moment. 2/n
Pent up demand and, especially, supply constraints (supply chains damaged, bankruptcies etc..) may lead to one-off price spikes registered in price indexes but not signifying real, sustainable inflation. With the new framework, the FED can keep expansionary policy. 3/n
This is an important feature of the new regime that other major Central Banks will likely adopt. The increased flexibility (or discretion) that monetary policy will have in the new regime is especially important for CBs with a hierarchical mandate focused on inflation 4/n
CBs with a dual mandate can always adopt an expansionary policy by invoking the maximum employment goal. This possibility will certainly materialize in the present crisis. The recovery of GDP and employment will be sluggish and will take time. 5/n
In Europe, GDP will not go back to its 2019 level before 2023 and later several weaker countries. We need expansionary macro policies, both monetary policy and fiscal. This year and next, at least, fiscal policy will be more effective in dealing with the crisis 6/n
Monetary policy has been struggling everywhere to attain its targets. The new FED regime provides flexibility but raises the issue of CBs capability to achieve higher inflation levels, just through the expectations channel. What will be the instruments, people may ask? 7/n
Forgetting that scepticism, what is relevant is that the new FED policy framework provides justification for keeping an expansionary policy that is needed for the economic recovery after such a major crisis. Even if a temporary supply induced overshoot of inflation may happen.8/8
Another point in the FED new framework: "its policy decision will be informed by its "assessments of the shortfalls of employment from its maximum level." The original document referred to "deviations from its maximum level." This redefines the second goal of the dual mandate/9
The new definition means that for "deviations" above the "maximum employment" objective the FED will not try to correct them. Presumably, in that situation, inflation goes up, and that provides the argument to restrict policy. Now only "shortfalls" mar trigger policy changes /10
From now, on the second part of the dual mandate can only be invoked to justify a policy move when employment is below " the maximum employment", which the FED does not fix "because it´s changing over time (Powell) /11
It is clear that this tweak on the employment/unemployment goal doesn´t make a big difference. It only excludes unlikely situations when employment would be above the "maximum" and inflation would be within the target. If it would happen the FED would not have moved anyhow /12
Just to make clear what was implicit in my previous tweets: the new FED regime of averaging inflation should also be adopted by the ECB and other significant central banks. Many good reasons justify that decision. /end
