, brainard ( 2020 ). 8 the neutral interest rate has continued to fall and is currently at a record low level. inflation and inflation expectations have systematically undershot the fed's target of 2 per cent. prior to the pandemic, unemployment in the united states had fallen to the lowest level in 50 years without any tangible impact on inflation. it is primarily two of the changes made by the fed in its policy document that are central to my discussion here today. firstly, that monetary policy shall be aimed at inflation overshooting 2 per cent for a period of time if inflation has previously undershot 2 per cent. earlier target deviations will thus be compensated for by deviations in the other direction. 16 this is new. in conventional inflation targeting, deviations from the target are regarded as bygones, which do not need to be compensated for. in his speech at jackson hole in august, chairman jerome powell called this a “ flexible form of average inflation targeting ”. what the federal reserve is concerned about is the relationship i mentioned earlier, that is, that if inflation has not reached up to the target level on average over a long period of time, this risks sooner or later affecting the long - term inflation expectations in the economy. they therefore want to make it clear that they are endeavouring to attain an average inflation rate of 2 per cent – “ average inflation targeting ”. 17 however, they have not committed to any specific formula for calculating the mean value, for instance, over which period this will apply – hence the term “ flexible ”. the second important change refers to the view of how the labour market should affect monetary policy decisions. previously, the wording was that monetary policy was guided by deviations from maximum employment. these deviations could of course be both positive and negative. according to the new wording, decisions will in future be based on an assessment of shortfalls from maximum employment. in practice, this means that low unemployment or high employment as such will not be trigger factors for monetary policy tightening, if inflation is not on its way up. the fed is thus saying that it will not risk putting the brakes on too early in economic upturns, but will allow them to proceed longer than has perhaps been the case previously. one reason is that if a strong labour market can be retained over a longer period of time, this will benefit weaker groups, which would otherwise have problems obtaining employment. this increases total employment but, interestingly enough, distributional

, the long - term forecast ( 5 years ahead ) has gradually been revised down and is currently at 1. 6 per cent, which is the lowest ever. 1 however, this is not so strange. it is explained primarily by two interacting factors. one is that the pandemic has resulted in an unusually rapid and large fall in demand. it is hardly surprising that this has the consequence that inflation is falling so far that it may be difficult to get it to rise quickly enough to reach the target level in a couple of years ’ time. the other factor is that the already low interest rates around the world make it difficult for the central banks to cut their policy rates as far as would be needed to stimulate demand to the necessary extent. this was a problem that was much discussed even prior to the pandemic. for instance, i argued in a speech in 2016 that the situation we are in now, with an inflation rate that we don't expect to quite reach the target even at the end of the forecast period, was a possibility in the coming years. 2 there was a similar debate in the united states, too, where the policy rate was significantly higher than in sweden. 3 i would like to make a brief digression about this, as it is essential to my continued reasoning. low neutral rate hampers expansionary policy interest rates in sweden and abroad have thus reached historically low levels. this is essentially due to structural factors, which imply that globally there is a greater propensity to save than to invest. 4 this in turn has meant that global real interest rates, that is, interest rates excluding inflation, have fallen in recent decades ( see figure 3 ). in addition, nominal interest rates around the world have also fallen due to many countries introducing inflation targeting. the nominal interest rate includes compensation for inflation. the fact that interest rates have fallen, and are now at historically low levels, means that the level where the central banks ’ policy rates are “ neutral ” — that is, neither expansionary nor contractionary – has also developed in a similar manner. the relationship between the neutral interest rate and monetary policy can be illustrated with the aid of figure 4. the neutral interest rate is represented by the broken line. when central banks conduct monetary policy via the policy rate, they change it in the way described in the solid line. an interest rate that is lower than the neutral one stimulates demand and inflation, while an interest rate that is higher than the neutral one has the