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Fed unanimously adopts new policy framework of flexible inflation targeting, eliminates ‘makeup’ strategy for inflation
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In Jackson Hole speech, says framework calls for balanced approach when central bank’s goals in tension
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Prior framework’s emphasis on overly specific set of economic conditions may have led to some confusion
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Framework removes language indicating zero-lower-bound is a defining feature of economy
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New framework designed to work in a range of economic conditions
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Idea of intentionally moderate inflation overshoot proved irrelevant
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New framework emphasizes commitment to act forcefully to ensure longer-term inflation expectations remain well-anchored
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Fed still believes it may not need to tighten policy solely based on uncertain estimates that employment may be beyond its maximum sustainable level
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Shortfall language in previous statement posed communications challenge, and is removed in new framework
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Preemptive action likely would be warranted should tight labor market pose risk to price stability
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Fed’s goals are in tension, must balance both sides of Fed’s mandate
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Stability of unemployment rate allows Fed to ‘proceed carefully’ as we consider changes to policy stance
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Risks to inflation tilted to upside, risks to employment to the downside
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In Jackson Hole speech says shifting balance of risks may warrant adjusting policy stance
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Downside risks to labor market rising
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GDP growth has slowed notably, reflecting slowdown in consumer spending
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Latest data indicates 12-month PCE inflation rose 2.6% in July; core rose 2.9%
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Effects of tariffs on consumer prices now clearly visible, expect effects to accumulate in coming months
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Reasonable base case is inflation effects of tariffs will be short-lived
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Possible that tariff-driven upward pressure on prices could spur lasting inflation dynamic, but unlikely, given downside risks to labor market
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Cannot allow one-time increase in price level to be ongoing inflation problem
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Tighter immigration has led to abrupt slowdown in labor force growth
This article was written by Greg Michalowski at investinglive.com.