Fed Chair Powell delivered a speech at the annual Economic Policy Symposium (typically held in Jackson Hole but live-streamed this year due to the pandemic) yesterday. As largely expected, Chair Powell unveiled a modest shift to the Fed’s monetary policy framework. While the Fed is not abandoning its 2.0% inflation target, the Fed will now seek to achieve inflation that averages 2.0% over time. Should the labor market tighten, the Fed will put less emphasis on pre-emptive monetary policy tightening to prevent an overshoot of inflation. Instead, the Fed will wait for evidence that inflation is heating up and allow inflation to run above 2.0% for some (unspecified) period of time before it looks to tighten policy. The Fed’s updated framework essentially signals that the fed funds target rate (currently in a range of 0.0%-0.25%) is likely to stay low for an extended period of time. In our view, an important nuance of the Fed’s updated policy framework is that future decisions about monetary policy will be based on a range of subjective factors, and not based on a specific unemployment rate or a formulaic approach. The Fed’s decisions about monetary policy will be based on a confluence of factors and the judgement of Fed policymakers, but they will not be bound by specific numerical targets. Overall, Fed Chair Powell’s announcement this week was not a surprise to the financial markets and does not represent an unexpected or drastic shift in the outlook for monetary policy. We have long anticipated that the Fed would likely allow inflation to rise modestly above 2.0% before pursuing a more aggressive monetary policy tightening and Fed Chair Powell’s speech this week confirms this view. Overall, the Fed continues to be dovish and remains focused on using its tools to support smooth financial market functioning.

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