Some responses from economists and commentators:
Mohamed A. El-Erian
(@elerianm)Even more central bank stimulus:
That’s what #markets–across the board–have taken away, at least for now, from #Fed Chair #Powell‘s remarks on changes to the #MonetaryPolicy framework.
With that, the initial reaction is a la #MMT: higher prices for #stocks, #bonds, #gold, etc
Bob Pisani
(@BobPisani)Powell speech: Implication for stocks. Stock traders have fairly straightforward view of Fed changes:
1. Low unemployment not spurring inflation
2. Rates lower for longer
3. May have higher levels of inflation without Fed raising rates
4. Positive for stocks@CNBC
Gauti Eggertsson
(@GautiEggertsson)Another comment about the new Fed policy strategy and Powell’s Jackson Hole speak: I am struck by how effective communicator Powell is. He is able to explain the framework, which some expected to be a major communication challenge, in simple straightforward terms.
Powell on tackling racial equality: ‘We really need it to be broader than just the Fed’
Powell has been asked what the Fed can do to help racial equality.
The effects of the pandemic have fallen to a large extent on service jobs with low wages, and this is heavily skewed towards women and minorities, Powell says.
The single most important thing we can do here is support a strong labour market, Powell says, but that is an all-governmental, society project.
But there are better tools from elected officials to address racial inequalities. He said:
We really need it to be broader than just the Fed.
The new policy does not dictate particular outcomes, Powell says.
It’s part of a broad programme to “aggressively seek†transparency and accountability, Powell says.
The new approach is not new among central banks (just look at the Bank of England and the European Central Bank) but it does mean that the Fed faces a political battle to sell it against hawks.
Tim Duy
(@TimDuy)The “rules†versus “discretion†debate is now over. Discretion wins as Powell throws the Taylor Rule into the dumpster.
US stock markets open at a record high
They aren’t huge moves, but stock markets on Wall Street have opened at new record highs.
- S&P 500 UP 6.12 POINTS, OR 0.18 PERCENT, AT 3,484.85 AFTER MARKET OPEN
- DOW JONES UP 90.65 POINTS, OR 0.32 PERCENT, AT 28,422.57 AFTER MARKET OPEN
- NASDAQ UP 17.16 POINTS, OR 0.15 PERCENT, AT 11,682.22 AFTER MARKET OPEN
Q: On the new average inflation targeting strategy, how will this be communicated and how will it change things?
Public communications are very important, Powell says.
We’re talking about “moderate†overshoots, not “permanent or for sustained periods of timeâ€, he says. This is not a formulaic approach.
I think it is the approopriate solution, he says. Undershoots of inflation are not frogotten but are made up later.
Powell says the central bank will engage in regular reviews of monetary policy roughly every five years, and with that he is finished – but there is a Q&A coming up (via a rickety connection with the questioner).
It is a robust updating of our monetary policy framework, Powell says.
The bank will be highly focused on fostering as strong as labour market as possible for all Americans, as well as steady inflation over time.
Powell: Federal Resrve will allow inflation to run above 2%
To counter the risks of running out of firepower the bank is prepared to use the full range of tools, Powell says.
A robust job market can be sustained without an increase in inflation, Powell says – unlike in the past.
The central bank will aim for inflation “moderately above 2% over timeâ€, targeting an average of 2%.
The dollar is weakening as Powell speaks (with a dovish message so far).
US DOLLAR INDEX DECLINES TO 92.67, EURO JUMPS TO $1.1870 AFTER POWELL COMMENTS
Longer-term inflation expectations may have been holding down inflation more than expected, Powell says.
Persistently low inflation is a “cause for concernâ€. It can cause a serious risk for the economy and a “adverse cycle†of ever lower inflation expectations.
This would give less scope for cutting interest rates in a downturn.
Once it sets in it can be very difficult to overcome, and the central bank wants to prevent it happening in the US, he says (perhaps a reference to Japan’s experience).
There have been four main developments in understanding of monetary policy, Powell says:
- Assessments of the long-run growth rate have declined.
- Interest rates have fallen across the world, partly because of demographic and population growth. The Fed has less scope to support the economy in a downturn because of this.
- Following the crisis the best labour market that had been seen for some time developed.
- The historically strong labour market did not trigger strong inflation, despite repeated forecasts that it would do so.
The Federal Reserve’s updated framework has been published here.
Inflation targeting has had an emphasis on transparency, showing the understanding that public communication is important for monetary policy, Powell says.
Powell is summarising the development of the inflation targeting regime through previous chairs.
A 2012 update was a “significant milestoneâ€, but it happened early on in the recovery from the financial crisis, but the understanding of monetary policy has developed since then.
Jerome Powell makes Jackson Hole speech
Jerome Powell is speaking via videoconference. Photograph: Youtube/Kansas City Fed
The Federal Reserve’s monetary policy framework must adapt, Powell says.
The central bank has published details of the new framework which he will discuss.
Much more to follow on the speech.
Jerome Powell will be starting in less than 10 minutes.
You can watch an introduction followed by his speech live here:
