The Federal Reserve approved a major shift in how it sets interest rates by dropping its longstanding practice of pre-emptively lifting them to head off higher inflation, a move likely to leave U.S. borrowing costs very low for a long time. The move Thursday won’t lead to a significant change in how the Fed is currently conducting policy because it had already incorporated the changes it formally codified Thursday. But the shift marked a milestone. Had the strategy been adopted five years ago, the Fed would have likely delayed rate increases that began in late 2015, following seven years of short-term rates pinned near zero. By signaling Thursday it wanted inflation to rise modestly above its 2% target, the Fed revealed how the global central bank principle of inflation targeting, widely adopted over the last quarter century, may have outlived its usefulness.
Source: Wall Street Journal.
