Calling the move a "robust updating" of the Fed's approach, Powell said the revised policy will allow "average inflation targeting," meaning inflation will be allowed to rise "moderately" higher than the longtime target of 2%, if needed to balance out long periods of sub-2% levels.
"Many find it counterintuitive that the Fed would want to push up inflation," he said during a virtual meeting at the annual Jackson Hole symposium. "However, inflation that is persistently too low can pose serious risks to the economy."
The Fed has maintained a 2% inflation target for years, but it has regularly come in under that target for much of the past decade. Long periods of low inflation are seen by most economists as a drag on economic vitality.
The new policy was unanimously approved by the Federal Open Market Committee, he said.
Analysts said the changes make it less likely the Fed will raise interest rates when unemployment falls, as long as higher employment levels don't influence inflation. That means interest rates would remain lower and more steady over the long term.
Powell's remarks are seen by some a signal the central bank won't tamp down quick economic growth during the COVID-19 crisis.
Powell promised, however, that the Federal Reserve won't hesitate to act if excessive inflationary pressures build or expectations climbed above levels "consistent with our goal."