PLANADVISER - September/October 2020 - 9

implications for monetary policy, " Powell
said.
" With
interest
rates
generally
running closer to their effective lower
bound even in good times, the Fed has
less scope to support the economy during
an economic downturn by simply cutting
the federal funds rate. 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. "
Rupert Thompson, chief investment
officer (CIO) at Kingswood Group, says the
changes can be seen as a " refinement. "
" Rather than having a simple 2% inflation
target as before, [the FOMC] is moving
to an average inflation target of 2%, " he
emphasizes. " It will now allow inflation to
overshoot for a while following a period
of undershooting, as has been the case in
recent years. The Fed has also tweaked its
full employment objective, increasing its
tolerance of employment running at or
above its maximum level. These moves
were not entirely unexpected and are a bid
to step up the effectiveness of its monetary
policy, which is being compromised now
that rates are so low. "
Echoing what seems to be commentators'
consensus, he says the changes make
it even more likely that rates will stay at
their " exceptionally low levels " for the next
few years-maybe longer. -John Manganaro
Technical Changes to the
FOMC Strategy Statement
AMONG the more significant changes to the
Federal Open Market Committee (FOMC)
framework document are the following:
* The FOMC has stressed that maximum
employment is " a broad-based and inclusive
goal " and states that its policy decisions
will be informed by its " assessments
of the shortfalls of employment
from its maximum level. " The original
document referred instead to " deviations
from its maximum level. "
* Of particular import to retirement savers
and institutional investors: As to price
stability, the FOMC adjusted its strategy
for achieving its longer-run inflation goal
of 2% by noting that it " seeks to achieve
inflation that averages 2%, over time. "
To this end, the revised statement says,
" following periods when inflation has
been running persistently below 2%,
appropriate monetary policy will likely
aim to achieve inflation moderately
above 2% for some time. "
* Other updates explicitly acknowledge
the challenges for monetary policy
posed by a persistently low interest rate
environment. -JM
Historical Inflation Rates, by Percent, 1979 - 2019
10%
12%
14%
2%
4%
6%
8%
0%
-2%
1980
1985
1990
Source: usinflationcalculator.com
1995
2000
2005
2010
2015
LOOKING BACK
AT THE FOMC
➜ The Federal Open
Market Committee
(FOMC) first adopted a
framework statement
to set forth its monetary
policy in 2012.
➜ The statement's
first public review was
announced by Chair
Jerome Powell in 2018.
It involved three distinct
components.
➜ First, the Federal
Reserve hosted a series of
15 " Fed Listens " events to
hear a range of perspectives
about how monetary
policy decisions affect
various communities.
➜ Second, the Fed,
a year ago June, convened
a conference at
which academic experts
addressed topics central
to the review.
➜ Third, starting that July,
the committee explored
the issues revealed during
the review. Analytical
staff work provided background
for the discussions.
➜ The FOMC intends to,
similarly, undertake a public
review of its monetary
policy strategy, tools and
communication practices
roughly every five years.
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