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The Change in U.S. Federal Reserve’s Monetary Policy Framework: Theories and Practical Background (No.244, 2020)

Nov 30,2020

By Tang Zhao, Research Institute of Finance, DRC

Research Report, No.244, 2020 (Total 5988) 2020-10-15

Abstract: August 2020 marked a major adjustment of U.S. Federal Reserve System (hereinafter referred to as the Fed) in nearly 40 years with its announcement to implement a new monetary policy framework, the core of which lies in setting an average inflation goal and strengthen the support for employment. Under the new framework, the Fed has tried to fully unleash economic development potential through increasing the tolerance for inflation, underlining sufficient employment and postponing the tightening of monetary policy. Owing to the framework, the Fed is able to prolong its easing monetary policy implemented due to the impact of Covid-19 pandemic. However conducive the framework transition is to the global economic growth recovery after the epidemic, it might escalate the tendency of central banks of all economies to vie for earlier implementation of their easing monetary policies, which will add to the deviation risks of the global financial sectors from the real economy. In the above-mentioned context, China needs to learn from the new concepts of U.S. Fed. monetary policy framework with the aim to further strengthen its monetary policy for employment; in the meantime, work needs to be done to seize the opportunities posed by the weakening tendency of the U.S. dollar so as to accelerate the internationalization of RMB and enhance China’s status in international financial system.

Keywords: U.S. Federal Reserve, monetary policy framework, inflation, employment stabilization