Fed relaxes inflation target in major policy shift

Representatives Financial Services Committee hearing on oversight of the Treasury Department and Federal Reserve response to the outbreak of the coronavirus disease, in Washington

The underlying USA economy remains solid, but high unemployment could persist for years in the sectors most impacted by the coronavirus pandemic, Federal Reserve Chair Jerome Powell said Thursday.

The Fed chairman is likely to make a case for low interest rates and higher inflation in an overhaul of the central bank's policy approach in his remarks at the Jackson Hole symposium, being held virtually this year, Reuters reported.

Wall Street's main indexes have risen as Federal Reserve Chair Jerome Powell rolled out the USA central bank's aggressive new strategy to restore the United States to full employment and lift inflation.

The policy shift is arguably the biggest for the Fed since Paul Volcker remade the central bank into an inflation-slaying force four decades ago, when prices were spiraling higher.

"This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation", he told the virtual conference.

Neil Williams, senior economic adviser at Federated Hermes, said that by pursuing an average, rather than fixed, inflation target, the bank could allow inflation "to travel beyond its preferred 2% destination before tightening rates".

Though the labour market was on fire in the two years leading up to the pandemic, inflation was falling well short of the Fed's longer-run, two-percent target. The change suggests the Fed's key overnight interest rate, already near zero, will stay there for potentially years to come as policymakers woo higher inflation. On Thursday it said it could conduct a new review of policy every five years.

When prices spike, consumers are worse off because they can't purchase as much.

People in those industries are "really going to struggle to find work".

Also, gold prices are being supported owing to return of geo-political crisis with Beijing firing missiles into the South China Sea and the United States imposing sanctions on various Chinese companies associated with the disputed region.

As he has repeatedly stated, this will "take support from Congress" with programmes focused on education, training and healthcare - though lawmakers are now deadlocked on the passage of another round of legislation to aid the economy.