Fed shifts long term stance
Fed Chairman Powell signalled that the Fed was shifting its approach to setting monetary policy implying it would tolerate periods of higher inflation and that rates would stay lower for longer. After a little intraday volatility, the dollar remained around $1.18 and $1.32 respectively though the currency has lost a little ground this morning. Equities edged up further in the US – though European exchanges fell for the most part – with the S&P 500 extending its record high close for a 5th consecutive day. Bonds did lose out as markets reacted to the Fed’s news with the curve steepening with US 5-year yields up 3bps on the day but US 10-year yields up 6bps to 0.75%
The Fed’s new statement on longer run goals sets out sizable changes in how the Fed comes to its decisions saying that the Fed will seek inflation that averages 2% over time and this new approach will allow for overshoots in inflation that may not have been tolerated previously without adjusting policy
The Fed will also support a ‘broad based and inclusive goal, regarding maximum employment and will be informed by ‘shortfalls in employment from its maximum level’. The interpretation of what constitutes full employment is now looser and implies that a ‘hot’ labour market and upward wage pressures might to allowed in certain circumstances
The Committee also judged that downward risks to employment and inflation had increased and that the Fed Funds rate is likely to be constrained by a lower bound more frequently than in the past i.e. rates will be lower for longer and additional measures from the Fed’s toolbox maybe needed and needed more frequently
On the agenda today, we get Euro area confidence data, US personal income and spending. The Jackson Hole symposium continues with BoE Governor Bailey due up