After the Federal Reserve unveiled major changes to the way it plans to manage inflation and unemployment, new analysis from Goldman Sachs supports the bank’s earlier prediction that the central bank will keep rates low until about 2025.
KEY FACTS
Last week, Fed chair Jerome Powell announced that the Fed will now seek to target inflation that averages 2% over time, meaning that it can allow inflation to surpass that level during periods of economic recovery.
The Fed hopes that the change will help boost the labor market by keeping rates lower for longer and thus providing additional support for the economy.
Keeping rates at their current levels means that borrowing costs for both businesses and consumers will stay lower for longer—it will be cheaper for small businesses to get loans, for instance, and cheaper to buy a home with a mortgage.
Researchers from Goldman Sachs found that an aggressive average inflation targeting policy would keep rates very low for a long period of time and would return inflation to its 2% baseline in about a decade.
Crucial quote
“This change conveys our judgment that a low unemployment rate by itself, in the absence of evidence that price inflation is running or is likely to run persistently above mandate-consistent levels or pressing financial stability concerns, will not, under our new framework, be a sufficient trigger for policy action,” Fed Vice Chair Richard H. Clarida said in prepared remarks on Monday.
Key background
This spring, the central bank dropped rates to nearly zero to prop up the economy during the early days of the coronavirus pandemic. At the time, the Fed indicated that rates would remain low until it was “confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
This article originally appeared on Forbes.
