The Fed Has A New Approach To Inflation
The Fed Has A New Approach To Inflation
What it means for your savings, credit-card debt — and your mortgage rate
Sept. 4, 2020 By Jacob Passy
The Federal Reserve is shaking things up — which is both good and bad news for consumers.
The Fed made some of the biggest changes to its policy in years following an extended review. The central bank has revised its approach to inflation and the labor market in a move that could usher in an extended period of low interest rates.
But the new approach won’t mean that consumers will save money across the board. “The Federal Reserve’s new strategy could divide the landscape for the various financial products important to consumers,” said Lynn Reaser, chief economist at the Fermanian Business & Economic Institute at Point Loma Nazarene University.
Here’s how the Fed’s new policy will affect Americans’ finances:
What did the Fed change?
The Fed is now officially less concerned about high inflation. Moving forward, central bankers will target inflation that averages 2% over time. This means that following a stretch with low inflation, the Fed might allow inflation to run above 2% for a period of time.
Along these lines, the Fed will concern itself less with the strength of the labor market. “A tight labor market is no longer correlated to inflation,” said Dan Geller, a behavioral economist and founder of consulting firm Analyticom.
In the past, the Fed’s official view was that a strong labor market could cause inflation to jump — as a result, the central bank would move to raise rates even if higher levels of inflation had yet to materialize when the job market was especially strong.
The new policy will allow the Fed to keep rates low even if the job market rebounds and inflation picks up. As a result, some have suggested that it may be many, many years before the central bank hikes rates again.
Americans will save on credit-card interest because of the Fed’s new policy The good news for any Americans with credit cards is that the annual percentage rate on your cards should go down — or remain low — for the foreseeable future.
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