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Fed Chair Sets Stage for Longer Periods of Lower Rates

Jerome H. Powell, the chair of the Federal Reserve, announced a major shift in how the central bank guides the economy, signaling it will no longer raise interest rates to keep the unemployment rate from falling too far and that it will allow inflation to run slightly higher in good times.

In emphasizing the importance of a strong labor market and aiming for moderately faster price gains, Mr. Powell and his colleagues laid the groundwork for years of low interest rates. That could translate into long periods of cheap mortgages and business loans that foster strong demand and solid job markets.

The Fed chief announced the change at the Kansas City Fed’s annual policy symposium, which is being held via webcast instead of in Jackson Hole, Wyo., where it has taken place since 1982. Mr. Powell used the widely visible forum to explain the results of the central bank’s first-ever review of its monetary policy strategy, which it has been working on for the past year and a half. In conjunction with his remarks, the Fed released an outline of its long-run policy strategy.

“Our revised statement emphasizes that maximum employment is a broad-based and inclusive goal,” Mr. Powell said in the remarks. “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”

Mr. Powell’s speech could help define his tenure as chair, which began in early 2018 in the midst of the longest economic expansion on record and has run straight into the sharpest downturn since the Great Depression. The central bank is simultaneously facing a major short-run challenge — the coronavirus pandemic has shuttered businesses and cost millions of jobs — and daunting longer-run shifts in the United States and global economy. Interest rates and inflation have slipped lower across advanced economies, leaving policymakers with less room to reduce borrowing costs to coax growth following downturns.

Mr. Powell’s announcement codifies a critical shift in how the central bank tries to achieve its twin goals of maximum employment and stable inflation — one that could inform how the Fed sets monetary policy in the wake of the pandemic-induced recession.

The Fed had raised rates as joblessness fell to avoid economic overheating that might end in breakaway inflation. It took such an approach from 2015 to 2018, raising rates a total of 9 times as the jobless rate slipped steadily lower, trying to guard against price increases before they materialized. But higher inflation never showed up, and critics have asked whether the Fed slowed the economy without reason.

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The Fed’s updated framework recognizes that too low inflation is now the problem, rather than too high.

[Read more about how the Fed’s view on inflation has been shifting.]

Its revised statement says that its policies will be informed by “shortfalls” of employment from its maximum level, rather than by “deviations” — suggesting that the central bank is no longer planning to raise rates to cool off the labor market simply because unemployment has dipped to low levels.

“This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation,” Mr. Powell said.

The central bank is also formally shifting its inflation approach, aiming to average 2 percent inflation over time, rather than as an absolute goal. In doing so, the Fed is trying to convince the public and investors that it will allow prices to rise a little bit faster. If public inflation expectations slip, it can lock in slow price gains. Those feed directly into the level of interest rates, and leave the central bank with even less room to cut them during times of crisis.

“If inflation expectations fall below our 2 percent objective, interest rates would decline in tandem,” Mr. Powell said. “In turn, we would have less scope to cut interest rates to boost employment during an economic downturn.”

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Higher inflation may seem like an odd goal to anyone who buys milk or pays rent, but excessively weak price gains can actually have damaging effects on the economy. A circle of stagnation in which lower prices leave less room to cut rates has played out in countries including Japan.

“We are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes,” Mr. Powell said. “However, inflation that is persistently too low can pose serious risks to the economy.”

In a question-and-answer session after speech, Mr. Powell said the Fed was “talking about inflation moving moderately.”

If the Fed can achieve slightly higher price gains, it will translate into more room for future rate cuts — and buying that extra headroom is a crucial goal in 2020. Long-running economic changes, such as an aging population with different saving habits and weaker productivity gains, have weighed on the interest rate setting that neither stokes nor slows the economy. That has left the central bank with less recession-fighting wiggle room.

Still, Mr. Powell pointed out that it he and his colleagues “are not tying ourselves to a particular mathematical formula that defines the average.”

Some economists questioned whether the Fed will actually manage to achieve its higher inflation goal.

“The Fed is announcing this policy framework in part to push up inflation expectations,” said Seth Carpenter, a former Fed research official now at UBS. “In practice, however, getting above 2 percent is a long way off.”

Many of the changes the Fed announced Thursday formalize an approach it has edged toward over the past decade. The Fed was patient in beginning lifting interest rates following the recession from 2007 to 2009, even as unemployment fell.

When it did start to raise borrowing costs in late 2015, under Janet L. Yellen, it did so slowly. Even those gradual moves have seemed like they may have been overkill in hindsight. Price gains hovered below the Fed’s 2 percent target even as pre-pandemic unemployment held near a half-century low.

Under Mr. Powell’s leadership, the Fed has increasingly emphasized the benefits of that strong labor market, which pulled long-sidelined workers into jobs and helped to foster strong wage growth for those who earn the least. The update bookends that evolution toward greater patience and more tolerance — or even encouragement — of historically- low unemployment.

The long-run document promises that the central bank will continue to hold reviews, roughly every five years, and will continue to consult the public as it has done over the past year through its “Fed Listens” events. That could help it to deal with the challenges of very low interest rates as the economy moves forward, and it will keep the public in the loop about how the Fed is approaching its targets.

“Public faith in large institutions around the world is under pressure,” Mr. Powell said in a question-and-answer session following his speech. “Institutions like the Fed have to aggressively seek transparency and accountability to preserve our democratic legitimacy.”

The Fed also explicitly noted in its statement that financial stability ranks among its key goals. In recent decades, expansions have ended when asset price bubbles — like the mid-2000s housing boom — got out of control, rather than at the hands of too-high inflation.

“Sustainably achieving maximum employment and price stability depends on a stable financial system,” the Fed said in its statement. “Therefore, the committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the committee’s goals.”

Mr. Powell’s remarks, and the central bank’s shift, are set against an unhappy backdrop.

Fed officials have taken action to support the economy as the pandemic-induced downturn drags on — cutting interest rates to zero, buying government-backed bonds in vast sums, and rolling out emergency lending programs. Still, more than one million people filed initial state jobless claims last week, data released Thursday morning showed.

The Fed has repeatedly emphasized that a strong job market and economy is an imperative goal, but that Congress will need to help achieve it.

“It is hard to overstate the benefits of sustaining a strong labor market, a key national goal that will require a range of policies in addition to supportive monetary policy,” Mr. Powell said.

He added that there was a strong economy under the surface of the ongoing weakness.

“We will get through this period, maybe with some starts and stops,” he said. Still, “we’re looking at a long tail” as people who work in industries heavily impacted, like travel and service, struggle to find new work in a process that could take years.

“We need to support them,” Mr. Powell said.

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The Fed’s Evolution Is Coming to a Computer Screen Near You

WASHINGTON — For more than a year, the Federal Reserve has wrestled with how to achieve its twin goals — maximum employment and stable inflation — in an era of tepid price increases and very low interest rates.

While not a major kitchen table topic, the Fed’s approach to monetary policy affects every household in America. When it lifts or lowers interest rates to slow or speed growth, it changes the cost of mortgages and car loans. Because its policies help to determine economic strength, they inform how many jobs are available and how long expansions last.

On Thursday, Chair Jerome H. Powell will have a chance to update America on the central bank’s soon-to-conclude framework review, in which it has revisited its policy tools for good and bad times, in a speech at the Kansas City Fed’s annual conference. The storied gathering of elite economists has been held behind closed doors in Jackson Hole, Wyo., since 1982. Because of the coronavirus pandemic, the event will be held remotely and streamed on the Kansas City Fed’s YouTube page this year, allowing the public to tune in for the first time ever.

Mr. Powell, who is scheduled to speak at 9:10 a.m., is expected to summarize what the Fed has discovered as it has spent 21 months discussing its future policy approach. He may stop short of offering up the full set of final results — the central bank has hinted that will happen when it updates its long-run policy statement, an outline of overarching principles that officials usually release in January but which many economists expect them to revamp at their Sept. 15-16 meeting.

Fed watchers expect the central bank to shift from targeting 2 percent inflation exactly to a more flexible approach, such as aiming for 2 percent on average over time. The exact details remain unclear, but the adjustment could lay the groundwork for long periods of near-zero interest rates and very low unemployment.

Officials have promised the coming tweaks will be more “evolution” than “revolution.” Yet they will represent the culmination of not just the review, but also a yearslong process in which economists have been forced to fundamentally rethink the relationship between unemployment and prices, and the role of central bankers in a modern economy that has undergone tectonic shifts as the population has aged and productivity growth has slowed.

“What we’ve seen over the past six to seven years is a gradual shift which, cumulatively, is powerful,” Stephanie Aaronson, a former Fed research official now at the Brookings Institution. Whatever adjustment is adopted “has to be seen in the context of all of the changes since the Great Recession.”

For decades, economists believed that as unemployment fell, worker scarcity would force employers to raise wages in order to hire. Businesses would raise prices to cover those labor costs, and inflation would result.

The Fed saw its role as choking off that upward price spiral before it got going. Because rate changes take time to work, that meant lifting the federal funds rate well before inflation actually materialized, in a bid to cool off demand and slow the economy.

But real life diverged sharply from the textbook scenario. Since the 2008 financial crisis, inflation has remained stubbornly below the Fed’s 2 percent target — a goal it is sees as just enough to grease the wheels of the economy without causing harmful side effects.

People once criticized Janet L. Yellen, a former Fed chair, and her colleagues for waiting so long to raise interest rates after the 2007 to 2009 recession, warning that they were setting the stage for runaway prices. Now, critics more often say that the Fed’s first post-recession rate increase — in December 2015 — came too early.

Lackluster inflation is not the only problem confronting the Fed. Interest rates have been falling across advanced economies, seemingly driven by gradual economic shifts such as population aging and weaker productivity growth. That leaves central banks with less room to bolster economic growth when times are tough by making money cheaper.

Because policy interest rates include inflation, weak price gains only serve to worsen the dilemma. Inadequate room to lower rates also leads to tepid recoveries and longer periods of slow inflation, feeding an unhappy cycle of stagnation.

Credit…Andrew Harnik/Associated Press

In light of the changes, the Fed has become more patient when it sets policy in recent years, allowing unemployment to drift lower in hopes of coaxing inflation higher.

By formally updating its framework, the Fed is trying to avoid a fate similar to the one that has befallen Japan. There, both interest rates and inflation trended downward for years, and the central bank has been forced to go to extreme lengths to try to stimulate the economy. Despite innovative and experimental policies — stock buying and negative interest rates among them — price increases have remained weak, trapped by public expectations. Europe is battling a similar phenomenon.

In part because the public’s understanding of future inflation seems to drive real-world economic results, the Fed is intent on clearly communicating what it is doing, and why. Officials have also increasingly taken the view that the Fed should try to be accountable to the people it serves.

The Fed went to great lengths to get the broader public involved in the policy overhaul, holding “Fed Listens” community events around the country alongside more typical academic conferences. On Thursday, Mr. Powell’s speech will be simultaneously available to academics and government officials — the usual Jackson Hole conference invitees — and armchair enthusiasts who have been following along from home.

While the Jackson Hole conference’s new democratization is driven by necessity, it is a fitting early conclusion for a review that focused on openness.

Wall Street analysts expect officials to set out a more concrete plan for the near future of interest rates once they have made the formal tweaks to their long-run statement. Fed officials signaled in their July meeting minutes that the updated document “would be very helpful in providing an overarching framework that would help guide the committee’s future policy actions and communications.”

To some degree, the anticipated adjustments will just commit to what is already happening in practice. Fed officials have given no indication that they are eager to raise rates, now at nearly zero, even if unemployment should fall quickly. Mr. Powell said at his late-July news conference that the framework changes “are really codifying the way we’re already acting with our policies.”

Still, “it’s a big change for them to codify and formalize it,” said Julia Coronado, founder of MacroPolicy Perspectives and a former Fed economist, in part because it means that Federal Open Market Committee, which sets interest rates, will now be tied into the approach. “It commits future committees.”

But it is unclear whether the adjustments Mr. Powell and his colleagues make will be enough to deal with the changes that have quietly transformed the modern economy.

The theoretical interest rate that would neither speed up nor slow down growth has dropped by more than 2 percent since the early 2000s, based on one popular model. Wringing out a few extra fractions of a percent by pumping up inflation will not fully restore that decline. And when it comes to crisis tools, longer-term interest rates have also dropped, rendering large-scale bond-buying programs meant to push them down less powerful.

“It’s not going to be enough,” Ms. Coronado said. After this crisis is over, she said, Congress should look at what tools the Fed has at its disposal to counter future crises. “We should be thinking big, and structurally.”

For now, Fed officials have turned to talking about government taxing and spending policy — the other lever that can stoke the economy, but one that is out of their hands. Central bankers have made clear that they believe Congress should pass another pandemic response package.

“The bottom line is that monetary policy is approaching its limits,” Paul Ashworth at Capital Economics wrote in an Aug. 25 note. “While Fed officials would never admit that publicly, that explains why they have become so outspoken in encouraging Congress to put more fiscal stimulus in place.”

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Federal Reserve Minutes Show a Litany of Reasons to Worry About Economy

WASHINGTON — Some businesses will not make it through the pandemic-spurred economic crisis. Consumer spending will not fully bounce back even into next year. And there is a serious chance of a double-dip downturn that could permanently scar the American labor force.

Those are some of the major points from the minutes released Wednesday of the Federal Reserve’s two-day meeting in which officials and central bank staff paint a bleak picture of what lies ahead for the American economy.

In the time since that gathering, held June 9 and 10, officials — including Jerome H. Powell, the Federal Reserve chair — have stressed that the economic outlook is deeply uncertain and have warned that containing the virus pandemic will be crucial to a recovery. But the minutes offer a glimpse into the concerns that occupied the Fed’s full slate of policymakers, 17 in all, when they last met.

The officials cited “extraordinary” uncertainty and “considerable risks” to the outlook. A number saw “substantial likelihood” of additional waves of virus outbreaks, with the potential to cause a drawn-out period of economic weakness. And they were concerned that government support could end too early or prove too small to handle the crisis at hand.

“Among the other sources of risk noted by participants were that fiscal support for households, businesses, and state and local governments might prove to be insufficient,” the minutes state.

Fed officials took some comfort in the fact that hiring rebounded in May, with unemployment dropping to 13.3 percent from 14.7 percent, instead of rising as expected. They said the “data suggested that April could turn out to be the trough of the recession.”

Even so, they said it was too early to draw any firm conclusions — and they remained worried about the future.

“The recovery in consumer spending was not expected to be particularly rapid beyond this year, with voluntary social distancing, precautionary saving, and lower levels of employment and income restraining the pace of expansion over the medium term,” according to the minutes.

Mr. Powell has repeatedly warned that consumers will shy away from high-touch activities — think packed restaurants, concerts and casinos — until health risks subside, making a full recovery unlikely until a cure or effective treatment to the coronavirus is found.

His colleagues said voluntary social distancing and structural shifts rooted in the pandemic “would likely mean that some proportion of businesses would close permanently,” even as states moved toward reopening.

The Fed’s June meeting was held as reopening plans swung into high gear in many states, but before a recent resurgence in coronavirus cases in parts of the South and West. There were about 23,000 new cases in the United States on June 10, New York Times data shows. That number skyrocketed to about 48,000 on June 30.

Fed officials have since suggested that a rising number of cases could hamper the economic healing process.

“I would hesitate to call this a recovery, because ultimately the virus will determine the pace at which we can go,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said at a Washington Post online event on Wednesday. “A V-shaped recovery is certainly not something that I think is happening.”

Policymakers voiced concerns in June that if the downturn persisted, it could permanently scar the economy by leaving workers out of jobs for long spells, eroding their skills. The minutes also show that they thought virus mitigation strategies might reduce productivity, hampering future growth.

  • Frequently Asked Questions and Advice

    Updated June 30, 2020

    • What are the symptoms of coronavirus?

      Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days.

    • Is it harder to exercise while wearing a mask?

      A commentary published this month on the website of the British Journal of Sports Medicine points out that covering your face during exercise “comes with issues of potential breathing restriction and discomfort” and requires “balancing benefits versus possible adverse events.” Masks do alter exercise, says Cedric X. Bryant, the president and chief science officer of the American Council on Exercise, a nonprofit organization that funds exercise research and certifies fitness professionals. “In my personal experience,” he says, “heart rates are higher at the same relative intensity when you wear a mask.” Some people also could experience lightheadedness during familiar workouts while masked, says Len Kravitz, a professor of exercise science at the University of New Mexico.

    • I’ve heard about a treatment called dexamethasone. Does it work?

      The steroid, dexamethasone, is the first treatment shown to reduce mortality in severely ill patients, according to scientists in Britain. The drug appears to reduce inflammation caused by the immune system, protecting the tissues. In the study, dexamethasone reduced deaths of patients on ventilators by one-third, and deaths of patients on oxygen by one-fifth.

    • What is pandemic paid leave?

      The coronavirus emergency relief package gives many American workers paid leave if they need to take time off because of the virus. It gives qualified workers two weeks of paid sick leave if they are ill, quarantined or seeking diagnosis or preventive care for coronavirus, or if they are caring for sick family members. It gives 12 weeks of paid leave to people caring for children whose schools are closed or whose child care provider is unavailable because of the coronavirus. It is the first time the United States has had widespread federally mandated paid leave, and includes people who don’t typically get such benefits, like part-time and gig economy workers. But the measure excludes at least half of private-sector workers, including those at the country’s largest employers, and gives small employers significant leeway to deny leave.

    • Does asymptomatic transmission of Covid-19 happen?

      So far, the evidence seems to show it does. A widely cited paper published in April suggests that people are most infectious about two days before the onset of coronavirus symptoms and estimated that 44 percent of new infections were a result of transmission from people who were not yet showing symptoms. Recently, a top expert at the World Health Organization stated that transmission of the coronavirus by people who did not have symptoms was “very rare,” but she later walked back that statement.

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      Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks.

    • How does blood type influence coronavirus?

      A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study.

    • How many people have lost their jobs due to coronavirus in the U.S.?

      The unemployment rate fell to 13.3 percent in May, the Labor Department said on June 5, an unexpected improvement in the nation’s job market as hiring rebounded faster than economists expected. Economists had forecast the unemployment rate to increase to as much as 20 percent, after it hit 14.7 percent in April, which was the highest since the government began keeping official statistics after World War II. But the unemployment rate dipped instead, with employers adding 2.5 million jobs, after more than 20 million jobs were lost in April.

    • How can I protect myself while flying?

      If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.)

    • What should I do if I feel sick?

      If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others.