Federal Reserve Chairman Jerome Powell signaled that the centralbank would pull out the stops to combat a global disinflationarydowndraft, foreshadowing a potential shift toward an easiermonetary policy over time.

Speaking to reporters on Wednesday, after the Fed left itsbenchmark interest rate unchanged, Powell said he is intent onevading the downward spiral in inflation and inflation expectationsthat's bedeviled other countries.

"We have seen this dynamic play out in other economies aroundthe world, and we are determined to avoid it here in the U.S.," hesaid. The strong words—combined with a minor yet telling tweak inthe Fed's post-meeting statement—suggested that the central bank ismoving toward a major change in how it interprets itsprice-stability mandate as it completes a review of its policyframework by midyear.

"They really want to communicate that they want inflation tomove above 2 percent because they want to see inflationexpectations pick up," said Robin Anderson, senior economist atPrincipal Global Investors. "It does seem a more dovish emphasis tomarket participants that the bar for any rate hike is extremelyhigh."

Under the new approach—which, Powell emphasized, is still underconsideration—the central bank would try to make up for pastdeviations from its 2 percent target, rather than treating missesof the goal as bygones, as it does now.

With inflation having run more or less consistently below thatgoal since it was introduced in 2012, such a shift would likelyresult in a more dovish Fed as policymakers sought to pump upprices and the economy. "We're not satisfied with inflation runningbelow 2 percent, particularly at a time such as now where we're along way into an expansion," Powell said.

The Fed's preferred gauge of price pressures—the personalconsumption expenditures price index—rose 1.5 percent for the 12months ending in November. Powell said inflation is expected tomove closer to 2 percent over the next few months, thanks toso-called base effects, "as unusually low readings from early 2019drop out of the calculation."

Powell said the Fed is happy with the stance of monetary policyafter cutting interest rates three times last year. And the centralbank is likely to remain that way unless the economic outlookchanges materially, no matter what President Donald Trump—who justthis week again called for lower rates—may want, the Fed chair madeclear.

Trade uncertainty has eased, though it's not disappeared, andglobal growth looks to be bottoming out, with the economic falloutfrom a spreading coronavirus still a wild card, he said.

In what some analysts saw as a significant shift, the Fed didalter its post-meeting policy statement to emphasize itsdetermination to hit its 2 percent inflation target, saying priceincreases need to return to that level, not just be near it.

"I definitely think it tilted dovish, and it reinforced acommitment to reflation," said Laura Rosner, partner at MacroPolicyPerspectives LLC in New York. "It's a step toward them actuallychanging their framework" for targeting inflation.

Technical Tweaks

Powell opened his press conference with an explanation of theFed's approach to managing money markets, including what he calleda small technical rise in the rate the central bank pays onreserves.

The Fed is currently expanding its balance sheet to ensure ampleliquidity in the money markets and avoid the sort of turmoil thatbriefly occurred last September. Powell said the Fed could end itsefforts to beef up its asset holdings in the second quarter byscaling back its monthly purchases from the current rate of $60billion per month.

He again took issue with those in the markets who argue that thebuying has boosted stock prices by flooding the financial systemwith liquidity, saying that was not the Fed's intent. The Standard& Poor's 500 index has risen about 10 percent since the Fedannounced its bill-buying program last October. In response to aquestion, Powell did allow that asset valuations are somewhatelevated. "Valuations are high but not at extremes," he said,adding that the overall risks to financial stability aremoderate.

What Bloomberg's Economists Say

The implicit message is that, while policymakers are alert tointernational developments (e.g., coronavirus, geopolitics, etc.),the accommodative setting of policy—75 bps [basis points] to 100bps below the committee's median estimate of neutral—should givethe economy enough support to endure modest changes to the risklandscape. — Carl Riccadonna, Yelena Shulyatyeva & AndrewHusby

Powell said the Fed expects to wind up its strategic frameworkreview in the middle of this year. The review, which was launchedin 2019, is looking at everything from how the Fed communicatespolicy to the tools it uses to carry it out.

"We undertook the review because we felt, and I felt, that it wastime to incorporate the realities of what you could call 'the newnormal' into our policy framework," Powell said. Those realitiesinclude "powerful global disinflationary trends" and "much lower"interest rates worldwide. While saying he did not want to prejudgethe review's results, Powell said that a shift away from anapproach of letting inflation bygones be bygones would also resultin a change in the conduct of monetary policy.

"In effect, they are setting the stage for the adoption of anaverage makeup inflation strategy," said Kathleen Bostjancic, aneconomist at Oxford Economics in New York.

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