The U.S. Federal Reserve has officially announced that it has transitioned the central goal of its monetary policy towards maximizing employment throughout the country. Although this seems like a sensible response to the current record high levels of unemployment in the U.S., it goes against what has been the hallmark of the Fed’s monetary policy in the past: keeping inflation at rates of 2% or below.
This paradigm shift in the Fed’s monetary policy essentially means that they are agreeing to maintain low interest rates in the U.S. until employment is back at traditional levels, which may take years. This will encourage businesses and consumers to keep borrowing, which could hopefully stimulate economic growth and expand employment throughout the United States.
The Fed will do this by injecting more liquidity into U.S. markets, which is desperately needed during the current economic crisis. Although this doesn’t mean that the Fed is going to “print more money” in a literal sense, it does mean that they will add more money to the overall economy by buying up U.S. securities. Since this will cause the money supply to expand, interest rates will be held down at rock bottom rates—potentially even after the economy recovers.
Additionally, for the first time ever the Fed has also agreed to use its monetary policies to try to promote “broad and inclusive” job gains that will help address racial and economic disparities in the U.S. This announcement came after several federal politicians, such as Democratic Congresswoman Maxine Walters, Senator Elizabeth Warren, and Presidential Nominee Joe Biden, had called on the Federal Reserve to implement measures that would advance the fight towards racial equality. The Fed’s commitment to doing so represents a significant transformation in its outlook on societal issues, as it has historically strayed away from such problems in order to maintain its status as an apolitical agency.
The flip side to the Fed’s policy shift is that they have agreed to the possibility of lifting inflation past its traditional levels, which could ultimately have consequences for the U.S. economy. Historically, the Federal Reserve has been adamant about keeping inflation rates low in order to avoid drastic price increases that could create economic uncertainty in the United States. However, in light of the disastrous economic atmosphere in the U.S. at the moment, they are now breaking away from what has been their historical objective. By prioritizing boosting employment over lowering inflation, the Fed is acknowledging that price levels could begin to increase for everyday American consumers—and that the U.S. Dollar could potentially start to lose some of its value.
However, this is unlikely to spiral out of control any time soon, as inflation in the U.S. is currently at record low rates anyways. This is because the economic turmoil amidst the COVID-19 pandemic has largely stagnated the flow of money throughout the U.S. economy. Although the Fed’s move could raise inflation to rates that are somewhat higher than usual, it is unlikely to rise to levels that would significantly endanger the overall economic environment in the U.S.
Additionally, the strength of the U.S. dollar and its dominance as the world’s reserve currency makes it highly unlikely that investors that will seek to abandon it, which is what has historically caused most hyperinflation crises. However, in light of this easing of inflation restrictions going forward, it seems more likely than ever that the U.S. dollar could be headed towards a gradual decline at some point in the future.
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