Powell puts the new inflation approach strategy forward

Fed Chairman Powell gave the detail what the market was looking for in his Jackson Hole speech and announced a change in policy approach with "targeting average inflation".

Fed Chairman Powell gave the detail what the market was looking for in his Jackson Hole speech and announced a change in policy approach with "targeting average inflation". That is, the Central Bank will allow inflation to go above the standard 2% target before hiking rates. In this case, in order to continue to support the labor market and the economy, the expansion will be continued at large rates and the inflation warming slightly more than normally desired will be ignored in this process.

 

The familiar issue at this point, as will be remembered from the previous "taper tantrum" period, was that the Fed was more inclined to increase interest rates as the unemployment rate fell. We are not in a position to talk about the natural rate of unemployment (non-inflationary unemployment) as the pandemic disrupts employment dynamics. It is now far from the point where the falling unemployment rate could be a basis for hiking interest rates and reducing expansion. We can also say that the Fed will move away from the classical approach. In employment, the “deviation from the maximum level” has changed to “the evaluation of the maximum employment gaps”. Here, too, comes the concentration on the low and middle income classes to boost employment, as the class least able to shoulder the coronavirus epidemic, the recovery in the economy is going through the improvement of the situation of middle and low income.

 

It appears that the Fed will not adhere to a formula and calendar. The insistence on achieving full employment continues, and the Central Bank still believes 2% inflation is an appropriate target.

 

In the shadow of Powell's speech, 2Q20 GDP contracted a record 31.7% in the second reading after contracting 32.9% in the first reading. There was an economic contraction of 5% in the first quarter. Private investments and personal consumption expenditures seem to have decreased less than the first reading. 2Q20 is the period in which the effects of practices such as “stay at home” and closing, remote work and unemployment benefits are felt the most.

 

Kaynak: Tera Yatırım
Hibya Haber Ajansı