InvestorQ : What are the major changes announced by the US Fed in its new Monetary Policy Framework announced by the Fed Chair?
Chandralekha Desai made post

What are the major changes announced by the US Fed in its new Monetary Policy Framework announced by the Fed Chair?

Answer
user profile image
NISHA Nayak answered.
3 weeks ago


The new Monetary Policy Framework or MPF, which was in the works since 2 years was finally given shape by Jerome Powell on 27 August. The MPF shifts the core focus of monetary policy in tune with the changing times.

There are 2 changes that will happen in the MPF. A long term approach to rates policy will reduce short term volatility surrounding the rate trajectory. Also, the MPF means that the Fed will be driven more by average inflation rates rather than by absolute rates.

Jerome gave a historical perspective as the chair of the Fed. He pointed out that over last 40 years Fed policy had essentially gravitated towards the Volcker formula. Since Volcker had taken charge amidst high inflation, monetary policy became all about price stability.

Powell points out that things have changed drastically post-Lehman. Therefore, the new MPF gives lower weightage to inflation and employment levels and also removes the sanctity of the levels of inflation and jobs as a determinant of future rates.

Since, Fed can now provide a longer term perspective, it can be deduced that the rates may be held near zero level for next 3 to 5 years. For the markets, it is now not about gyrating bond and equity markets around rates.