On Thursday, The Federal Reserve announced plans to allow prices of goods to run higher in an effort to improve the economy that had been hard hit by the coronavirus pandemic.
Higher inflation will increase the cost of nearly everything, even essential products, including groceries, diapers, and gasoline. Federal Reserve Chairman Jerome Powell said the central bank was aiming for a 2 percent inflation rate over time.
During his speech at the Kansas City Fed’s 44th annual Economic Policy Symposium, Powell said that the push for increased inflation is the result of the pandemic continuing to hinder the economy. Despite the higher inflation, they will refrain from raising interest rates until prices begin to increase. The Fed is expected to keep short-term interest rates near zero for the next five years. During and after the 2007-2009 Great Recession, the Fed also kept rates near zero for several years.
The idea is that higher inflation would assist citizens in the long run.
“The persistent undershoot of inflation from our 2 percent longer-run objective is a cause for concern. Many find it counterintuitive that the Fed would want to push up inflation,” Powell said. “After all, low and stable inflation is essential for a well-functioning economy.”
Powell acknowledged that higher prices for essential goods such as food and gas, contribute to “the burdens faced by many families, especially those struggling with lost jobs and incomes.” However, he said inflation that’s too low can result in an adverse cycle of ever-lower inflation and inflation expectations.