Statement on Longer-Run Goals and Monetary Policy Strategy

Statement on Longer-Run Goals and Monetary Policy Strategy

Adopted effective January 24, 2012; as amended effective August 27, 2020

The Federal Open Market Committee (FOMC)

is firmly committed to fulfilling its statutory

mandate from the Congress of promoting maximum employment, stable prices, and moderate

long-term interest rates. The Committee seeks to

explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates

well-informed decisionmaking by households

and businesses, reduces economic and financial

uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic

society.

Employment, inflation, and long-term interest

rates fluctuate over time in response to economic

and financial disturbances. Monetary policy

plays an important role in stabilizing the economy in response to these disturbances. The

Committee’s primary means of adjusting the

stance of monetary policy is through changes in

the target range for the federal funds rate. The

Committee judges that the level of the federal

funds rate consistent with maximum employment and price stability over the longer run has

declined relative to its historical average. Therefore, the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past. Owing in part to the

proximity of interest rates to the effective lower

bound, the Committee judges that downward

risks to employment and inflation have increased. The Committee is prepared to use its

full range of tools to achieve its maximum employment and price stability goals.

The maximum level of employment is a broadbased and inclusive goal that is not directly measurable and changes over time owing largely to

nonmonetary factors that affect the structure and

dynamics of the labor market. Consequently, it

would not be appropriate to specify a fixed goal

for employment; rather, the Committee’s policy

decisions must be informed by assessments of

the shortfalls of employment from its maximum

level, recognizing that such assessments are necessarily uncertain and subject to revision. The

Committee considers a wide range of indicators

in making these assessments.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the

Committee has the ability to specify a longer-run

goal for inflation. The Committee reaffirms its

judgment that inflation at the rate of 2 percent, as

measured by the annual change in the price index

for personal consumption expenditures, is most

consistent over the longer run with the Federal

Reserve’s statutory mandate. The Committee

judges that longer-term inflation expectations

that are well anchored at 2 percent foster price

stability and moderate long-term interest rates

and enhance the Committee’s ability to promote

maximum employment in the face of significant

economic disturbances. In order to anchor

longer-term inflation expectations at this level,

the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges

that, following periods when inflation has been

running persistently below 2 percent, appropriate

monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.

Monetary policy actions tend to influence economic activity, employment, and prices with a

lag. In setting monetary policy, the Committee

seeks over time to mitigate shortfalls of employment from the Committee’s assessment of its

maximum level and deviations of inflation from

its longer-run goal. Moreover, sustainably

achieving maximum employment and price stability depends on a stable financial system.

Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks,

including risks to the financial system that could

impede the attainment of the Committee’s goals.

The Committee’s employment and inflation

objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it takes into account the employment shortfalls and inflation deviations and the potentially

different time horizons over which employment

and inflation are projected to return to levels

judged consistent with its mandate.

The Committee intends to review these principles and to make adjustments as appropriate at its

annual organizational meeting each January, and

to undertake roughly every 5 years a thorough

public review of its monetary policy strategy,

tools, and communication practices.