The article “The new Powell doctrine” from The Economist discusses the approach of the new chairman of the US Federal Reserve, Jerome Powell, to monetary policy.
Powell’s approach to monetary policy is based on flexibility and pragmatism, rather than strict adherence to rules or models. Powell has indicated that he is more willing to adjust policy based on changing economic conditions, rather than relying on pre-determined rules or models. This approach has been especially evident in the Fed’s response to the COVID-19 pandemic, which has required the Fed to be nimble and adaptive in its policies.
More attuned to real economy and less focused on Inflation targets.
Powell has emphasized that the Fed should be more concerned with achieving full employment and ensuring a strong labour market, rather than simply targeting a specific level of inflation. He believes that a strong labour market is key to achieving the Fed’s dual obligation of price stability and maximum employment.
He has also indicated that the Fed is willing to allow inflation to run above its 2% target for a period, to achieve a strong labour market. The idea is that by allowing inflation to run above 2% for a period, the Fed can make up for periods when inflation has been below 2%. This can help to ensure that inflation expectations remain anchored and that the labour market remains strong.
Communication, Transparency and Interest Rates
Powell has made a concerted effort to communicate the Fed’s policies and actions in a clear and understandable way. He has held regular press conferences after each Federal Open Market Committee (FOMC) meeting and has sought to use plain language rather than technical terminology. He has also been more transparent about the Fed’s decision-making process, including releasing transcripts of FOMC meetings with a shorter lag time.
Powell has also been more cautious in raising interest and has emphasized that the Fed will be patient in responding to inflationary pressures. He has indicated that the Fed will wait until it is confident that inflation is on track to reach its 2% target before raising interest rates. As well as indicating that the Fed will not be swayed by temporary fluctuations in inflation but will instead focus on longer-term trends.
The article explains how Jerome Powell, the new chairman of the US Federal Reserve, has a flexible and pragmatic approach to monetary policy. Powell prioritizes a strong labour market over strict adherence to inflation targets and stresses the importance of communication and transparency. He is cautious in raising interest rates and willing to tolerate above-target inflation to ensure a strong labour market. Overall, Powell’s approach differs from his predecessors and acknowledges the complexity of the economy.
We will be patient as we determine what future adjustments to the federal funds rate may be appropriate to support our goals.– Jerome Powell
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