Annually held in August by the Kansas branch of the Fed in the Jackson Hole Valley in Wyoming, the ‘Jackson Hole Economic Policy Symposium’ was held via webcast this year due to Covid-19. At this event, which is quite prestigious in the field of economics, the eyes of the markets were on Fed Chair Jerome Powell.
At the symposium, Jerome Powell cited the new approach the Fed has adopted in its monetary policy strategy. According to this approach, the Fed will target an average of 2 percent inflation, noting that they have made a significant change to price stability, Powell also said that inflation expectations will increase and interest rates will be at lower levels for a long time. Stressing that the new monetary policy strategy, in which employment is ahead of inflation, will focus on a strong employment market, the Fed Chair noted that maximum employment is a broad-based and inclusive goal.
Describing the changes as a ‘strong update on monetary policy,’ Powell also added that ‘if over-inflationary pressures arise and inflation expectations continue to remain at levels above our target, the central bank will not hesitate to take action.’
By clearly expressing Fed Chair Jerome Powell’s willingness to create inflation, we can clearly say that adopting an average inflation targeting approach in a dovish tone is a situation expected by markets. In the first half of 2020, the Fed removed the boundaries of monetary expansion, as well as pulling the federal funding target to the 0 – 0.25 percent range in order to minimize the downside pressures created by the coronavirus on economic activities. The Bank’s new approach also indicates that it will maintain its monetary policy stance as an expansionary for a long time in order to support the US economy trying to recover.
Considering that consumption behavior subdued by the concerns of households about the future due to the coronavirus, will take a long time to recover, and the Fed promises to maintain its expansionist stance and low interest rates, signaling that it will tolerate increases in consumer prices due to low-cost abundant liquidity in this process.
It was understood in the markets that the Fed would not be in a hurry to increase interest rates in order to reach the inflation target adopted in 2012, and it was accepted that inflation expectations would increase in the long run. Indeed, US long-term bond yields rose slightly, and the yield curve rose to a two-month high, indicating that the Fed’s inflation targeting was reasonable in the markets.
On the other hand, the Fed’s signaling that it will maintain current low interest rates signals that the USD, the most important reserve currency, will continue to be under pressure, maintaining the questionable position of the real yield advantage in global markets, while waiting for demand for precious metals to continue to recover at this stage. It is also worth noting that stocks will also suffer from long-term low interest rates.