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OUR DISTRICT SF FED BLOG FOMC Rewind: Fed Updates Long-run Employment and Inflation Goals September 18, 2020 The Fed wrapped up an extensive review of its monetary policy strategy, tools, and communication practices with an update to the long-term goals for employment and inflation. What does that mean for you? Let’s rewind. Inflation goals 01:08 Employment goals 01:09 TRANSCRIPT Par t 1: Inflation goals Ellen: Hey there! Why is the Fed trending right now? Renuka: Oh yeah, they adjusted how they target inflation Ellen: Target inflation? What does that mean? Renuka: It’s a way to think about how to keep prices stable Renuka: That’s one of the Fed’s main goals Ellen: So what’s the target? Renuka: For years the Fed has aimed for 2% inflation Renuka: But it’s been below that Renuka: So they will make up for the lows sometime in the future Ellen: How does that work? Renuka: When inflation starts to rise, it’ll be okay if it stays a bit above target for a while Renuka: To average out for times when it was low Ellen: Got it. But why change now? Renuka: The economy has changed Renuka: So it makes sense to rethink the best way to meet the goal Ellen: How is the economy different? Renuka: Inflation doesn’t respond to the economy like it used to Renuka: So it’s often below the Fed’s target Ellen: And the change will help? Renuka: Yeah! That way people can be sure prices will stay stable Renuka: And that helps the economy grow Ellen: Ah ok, thanks! Renuka: Any time! Par t 2: Employment goals Sean: Hey Shelby! Does the Fed have anything to do with jobs? Shelby: Oh yeah! One of the Fed’s main goals is maximum employment Sean: What does maximum employment mean? Shelby: That’s something the Fed just updated Shelby: They’ll focus on having enough jobs Shelby: Without worrying about having too many Sean: Why would they ever worry about too many jobs? Shelby: A booming job market used to mean higher inflation Shelby: But now, inflation stays low, even with a lot of jobs open Sean: How will they know if they hit maximum employment? Shelby: One way to think about that is Shelby: When everyone who wants a job can get one Shelby: The goal is to reach people everywhere Sean: Why is that important? Shelby: For a healthy economy, everyone needs the chance to work Sean: Especially when things are stressed! Shelby: Yeah, low and moderate income areas are often hit hardest Shelby: So it’s important to make sure everyone benefits when the economy gets strong Sean: So, why the change? Shelby: They’ve talked to people all over the country since 2019 Shelby: So they’re acting on what they’ve learned Sean: Interesting, thanks! You may also be interested in: • The Federal Reserve’s New Monetary Policy Framework: A Robust Evolution • Statement on Longer-Run Goals and Monetary Policy Strategy • Federal Open Market Committee announces approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.