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News out of Jackson Hole....

Friday, August 28, 2020

A new Federal Reserve (Fed)  framework policy that was pretty well-telegraphed was announced by Jerome Powell at the Jackson Hole Economic Symposium this afternoon. The Fed will now target an average longer term inflation rate of 2% - as in, allowing inflation to run hotter than normal before they would consider raising rates. Comparing to the other major economy that has gone down this path – Japan back in 2016 – all it means is that rates are likely to be lower for longer now. Inflation above 2% is not a scenario that we can envisage happening for the foreseeable future, and I would bet even Powell would privately admit to that. With an economy that is now swamped in high levels of unemployment, wage inflation pressure is arguably non-existent and all the fiscal and monetary firepower that has been deployed this year still sees inflation remain stubbornly below 2%, so the markets don’t believe an inflation bump is coming when the Fed has failed so far in achieving it. The rates markets have barely moved on the back of this announcement, with inflation protection bonds hardly moving; the hotter areas of the market were catching a modest bid, with gold up a little before retracing any gains and equity markets trading a little firmer. But all in all, this was an expected move by the Fed and isn’t generating the usual buzz we sometimes see out of Jackson Hole.  

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