August 27, 2020

THE FED TO TOLERATE HIGHER INFLATION AND STRENGTHEN FOCUS ON EMPLOYMENT

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In Short

The statement made by Chair Powell at the virtual Jackson Hole meeting was in the end more dovish than expected.
THE FED TO TOLERATE HIGHER INFLATION AND STRENGTHEN FOCUS ON EMPLOYMENT
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Highlights:

  • Speaking at the Jackson Hole virtual summit Fed Chair Powell announced a throughout revision of its monetary policy strategy, which went above expectations.
  • As widely expected, the Fed will shift to an average inflation targeting over the business cycle, allowing for temporary overshoots beyond the 2%. Noteworthy, though, the Fed will grant itself some wiggle room as the time span used to average inflation will not be defined precisely. 
  • The surprise was the asymmetric treatment of labour market outcomes: higher unemployment rate will get a bigger weight than low rates in the new Fed reaction function. This adds a further downward bias to expected rates.
  • The Fed signals a shift towards discretion and away from rules, as it acknowledged the difficulties in measuring with precision structural variables like the equilibrium unemployment rate. 

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THE FED TO TOLERATE HIGHER INFLATION AND STRENGTHEN FOCUS ON EMPLOYMENT

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