Feds Policy Shift Signals Lower Interest Rates Are Here To Stay  

August 28, 2020 at 9:44 am Leave a comment

The Fed has a dual mandate to both foster economic growth and maximum sustainable employment.  Yesterday the Fed made an historic announcement that will have an immediate impact on your credit union.  In a nutshell, the Fed is going to tolerate more inflation and be more sensitive to the short-term employment consequences of future interest rate hikes.  RIP to the Paul Volcker era.

In 2012 the Federal Reserve issued a Statement on Longer-Run Goals and Monetary Policy Strategy.  By the hyper-conservative standards of the Federal Reserve, this statement represented a radical departure from Fed practice by providing forward guidance to the public on the framework it would use when deciding to raise or lower interest rates.

The amended document makes several important changes in emphasis.  First, the Federal Reserve simply can’t cut rates any lower.  By signaling a willingness to tolerate inflation, it is hoping to preempt fears that decreases in unemployment or robust economic growth will result in the Fed immediately raising interest rates.  In the amended statement, the Fed is no longer going to be concerned if inflation consistently runs above the Fed’s 2% target rate.

Furthermore, the Fed is shifting its assumptions about how low unemployment can go before triggering inflation.  Specifically, the Fed commits to assessing “shortfalls in employment” when deciding whether or not to raise interest rates.  The importance of this shift was underscored in a speech by Fed Chairman Powell accompanying the new statement in which he explained that the Fed has been influenced by the fact that historically low unemployment rates have not triggered inflation.  Furthermore, this trend has been a particular benefit to Black and Hispanic individuals who have experienced “life changing gains for many families”.

Just how big a shift does the new Fed policy stance represent?  A lot of commenters have pointed out correctly that these changes put in writing shifts that have already been taking place for several years.  But this analysis misses the importance of the moment.  Inflation was the number one economic threat that the Federal Reserve has battled since the late 1970s.  With the Fed’s announcement yesterday, it announced a paradigm shift in which the Volcker epic has ended.  Going forward, the lack of inflation is to be as feared as much, if not more, than the potential risks of too much inflation.

Entry filed under: Economy, econony. Tags: , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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