Whereas the previous target sought to minimize deviations when employment was too high or low, the Fed now aims to"eliminate shortfalls of employment from its maximum level," Governor Lael Brainard said inPut another way, the central bank will push for a labor market that doesn't just feature low unemployment, but also inclusivity and healthy wage growth. The new mandate sounds encouraging. But to achieve it, the Fed is entering uncharted territory.
Since the start of the coronavirus recession, Fed officials made it clear they weren't going to use the same strategy. The Fed's new framework seeks inflation that averages 2% over time. That opens the door to periods of stronger inflation. "There was a time when there was a tight connection between unemployment and inflation. That time is long gone," Powell said."We had low unemployment in 2018 and 2019 and the beginning of '20 without having troubling inflation at all."Despite Powell's repeated messaging that stronger inflation will prove largely"transitory," some economists slammed him for risking a dangerous inflationary spiral.
Higher inflation also tends to give way to higher wages, but rising pay might not benefit the economy as some hope.suggests most additional income would mostly go toward paying debts and boosting savings, with only a fraction going toward spending.
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