Jerome Powell announced the new policy during his speech in Jackson Hole last Thursday. In the past, the central bank has targeted a 2% inflation rate as measured by CPI. Now it will shift to "average inflation targeting." In effect, the Fed will allow the CPI to run "moderately" over 2% "for some time" to balance out periods where it runs under that level.

"Many find it counterintuitive that the Fed would want to push up inflation. However, inflation that is persistently too low can pose serious risks to the economy," Powell said during prepared remarks at the summit.

Of course, when you define inflation correctly – as an expansion of the money supply – it is anything but "too low." In fact, it is at the highest level in history.  But based on the CPI number, inflation has been well below 2% for many years. That means that the Fed will likely hold interest rates at zero for a significant amount of time – probably years – even if CPI runs above 2%. As Peter put it – the Fed has effectively raised its inflation target, but we don't actually know what that target is.