The Federal Reserve's new plan to run the economy hot looks easier said than done as the central bank confronts multiple forces holding down inflation.
"The Fed needs to articulate very clearly how they plan to achieve the new objective," Aneta Markowska, chief economist at Jefferies, wrote in a report to clients. "Otherwise, these are just words on paper that don't really mean anything."
Fed Chairman Jerome Powell on Thursday outlined a new approach to setting U.S. monetary policy. The Fed, he said, will sometimes allow inflation to run above the 2% target to make up for prior undershoots, and allow unemployment to run lower than officials had previously tolerated.
The move confirmed to investors that the Fed is likely keep interest rates near zero for years to come as it seeks to decisively achieve its inflation goal, adopted in 2012. Inflation has averaged only 1.4% since then amid headwinds affecting the U.S. and other major economies, including weak productivity growth, globalization, aging populations and technological change.
Fed policymakers meet again Sept. 15-16 when they'll have a chance to spell out how the new strategy will shape their policies aimed at pulling the U.S. economy out of its worst downturn since the Great Depression.
Economists at Deutsche Bank said officials may clarify their guidance on the path of rates by linking future hikes to reaching certain thresholds for inflation and employment. Minutes of their July meeting showed they'd debated this approach.
Mr. Powell's announcement, though not entirely unexpected, marked the completion of a historic shift for the world's most powerful central bank. Instead of worrying that very low unemployment would provoke inflation, they now have moved their focus almost fully onto too-low inflation.
To justify that, he made a point of explaining why persistently low inflation is a problem for central bankers, particularly when combined with low economic growth. It results in very low interest rates, even during economic expansions. That means policymakers have little room to cut borrowing costs when a downturn strikes.
"The result can be worse economic outcomes in terms of both employment and price stability, with the costs of such outcomes likely falling hardest on those least able to bear them," Mr. Powell said.
On the other side of the argument, there's a camp of investors convinced that the Fed's ultraeasy monetary policy and massive government spending risk re-igniting the runaway inflation of the 1970s.