Federal Reserve chair Jerome Powell announced Thursday that the central bank will seek to maintain inflation that averages 2% over time; the major change from the Fed’s previous policy, under which it raised rates to keep inflation from overshooting that target, is designed to prevent it from slowing down an economic recovery by withdrawing support too early.
That means that instead of withdrawing support to the economy in anticipation of prices rising, the Fed will now tolerate periods of higher inflation in order to focus on keeping unemployment low. One of the ways the Fed can now do that is by keeping interest rates lower for a longer period of time—that would mean that borrowing costs would remain lower for consumers and businesses, which would hopefully spur hiring and economic growth.