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The Federal Reserve’s new framework is not a judgement that the previous strategy was ineffective but that low underlying interest rates, other changes to economy required a new approach, Federal Reserve’s Vice Chairman Richard Clarida said on Monday.

Additional takeaways

“Those changes meant US faced more risks of weak prices, higher unemployment in recessions.”

“By late in the last expansion data showed employment and wages could rise without inflation.”

“New language on employment means a low unemployment rate “by itself” and in the absence of inflation will not be a sufficient trigger for a rate hike.”

“New language keying Fed to shortfalls of employment a robust evolution in the Fed’s approach.”

“Change in employment language shows that macro models have been wrong and that rate hikes in the absence of inflation are difficult to justify.”

“Fed debate on new policy included a healthy range of views.”

“Fed policymakers broadly agreed that the economy had changed so much in recent years that the fed’s approach needed to change as well.”

“New goal of average 2% inflation over time represents aspiration and does not tether policy to any formula or rule.”

“Forward guidance and large scale asset purchases “have been and continue to be effective ways to support the economy.”

“Negative rates not seen as attractive policy for US.”

“Yield curve control seen providing only modest benefits assuming credible forward guidance and asset purchases.”

Yield curve control could be reassessed in the future if conditions change markedly.”

“Now that new strategy document has been ratified fed can study possible refinements to its quarterly dot plot projections with aim of deciding on any changes by end of the year.”

Market reaction

The US Dollar Index showed no reaction to these comments and was last seen losing 0.07% on the day at 92.23.

Expert score

5

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