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America has a new central bank

Today is a truly historic day in Fed history — one that will have a transformative effect on U.S. monetary policy for the foreseeable future.

Driving the news: For decades, the main job of central banks has been to keep inflation down. The Fed has now effectively changed that policy, to instead prioritize maximum employment.

  • What they’re saying: “Following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time.”

Between the lines: Fed attitudes towards inflation have been evolving steadily in recent years, as it has stubbornly refused to tick up even during periods of full employment.

  • Today’s announcement marks the end of the Fed worrying that employment can sometimes be too high.
  • Before today, the Fed was charged with assessing “deviations” from maximum employment — either to the upside or to the downside. Now, the Fed will only look at “shortfalls” from that level.
  • It’s an admission that an economy can never have too much employment.

The big picture: The biggest change is that if the Fed expects inflation, it now no longer needs to raise interest rates. Instead, it can wait and see whether inflation actually arrives, and act only then.

Go deeper: The Fed’s messaging around this move is exemplary. There’s a simple and clear press release, a major speech from Jay Powell, a detailed policy statement, and then a collection of a dozen different papers all filling out the details of the thinking that went into the new policy.

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The bottom line: This news represents a radical change in how the Fed thinks about its job. It will provide powerful ammunition should ECB president Christine Lagarde want to start trying to make similar changes.

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