The Federal Reserve announced a significant change Thursday in how it manages interest rates by saying it plans to keep rates near zero even after inflation has exceeded the Fed's 2% target level. The change signifies that the Fed is prepared to tolerate a higher level of inflation than it generally has in the past, per the AP. And it means borrowing rates for households and businesses—for everything from auto loans and home mortgages to corporate expansion—will likely remain ultralow for years. The new goal says that "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."
In a speech detailing the changes, Chair Jerome Powell made clear that the policy change reflects the reality that high inflation—once the biggest threat to the economy—no longer seems to pose a serious danger, even when unemployment is low and the economy is growing strongly. Rather, he said, the economy has evolved in a way that allows the Fed to keep rates much lower than it otherwise would without igniting price pressures. "The economy is always evolving," Powell said. "Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation."
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