Investors Cheer Powell's New 'Average Inflation Targeting' Policy
Investors Cheer Powell's New 'Average Inflation Targeting' Policy
What to expect when Jay Powell addresses the world's top central bankers
28 August, 2020, 10:24
The aim is to correct the "shortfalls" in achieving the Fed's goal of maximum employment, and a recognition that with changes in the global economy, a tight job market does not necessarily drive prices higher.
Gold prices declined further as the U.S. central bank rolled out an aggressive new strategy to lift employment. It rallied to an all-time high earlier this month as governments and central banks employed stimulus measures to curb the coronavirus pandemic's damage on economies.
"The near V-shape rebound in US 10-year inflation expectations since mid-March is at risk of stalling", said Dhar.
The comments were widely expected and markets had reacted ahead of the announcement.
The euro changed hands at $1.18155, after nearly hitting last week's low of $1.17545 overnight.
World stocks moved in a tight range on Thursday, reserving judgement while bank stocks climbed on the news, with Citigroup and Bank of America up 1.9 percent and JPMorgan Chase up 2.5 percent.
The updated framework will allow inflation to run moderately above its 2% target "for some time" following periods of price growth persistently below that mark.
Under the new approach, the USA central bank will seek to achieve inflation averaging 2% over time, offsetting below-2% periods with higher inflation "for some time", and to ensure employment does not fall short of its maximum level.
The policy shift, though telegraphed in recent statements, is a significant change for the Fed and central banking more generally, as inflation for decades has been the economic villain to be stamped out at every turn.
"Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations", Powell said. That challenge was part of the impetus for the strategy review.
The Fed cut interest rates to near zero at two unscheduled meetings in March and began purchasing massive quantities of USA treasuries and agency mortgage-backed securities to fix financial markets. These measures had sparked investor demand for safe-haven assets and driven gold to multiple record highs throughout the year.
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Cases presumed active, meaning test results were confirmed within the last 14 days, also continued to notably decline. After cases began rising in late June and early July, the number of new cases has dropped steadily in August.
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