The Fed changes its way of acting after a historic speech.
“A true turning point” or “historic speech” are some of the qualifiers that analysts have uttered after hearing the words of Jerome Powell, president of the Federal Reserve (Fed), in Jackson Hole. Much was expected of him and he has not disappointed In fact, the market is clear about its interpretation of an intervention that “will be remembered for years”: interest rates will remain low until 2024 and the central bank will have a free hand with inflation.
“In essence, interest rates will stay near zero for a long, long time,” say Spreadex experts, referring to the consequences of the Fed’s decision to set an “average target” for inflation of 2%, and not having to comply yes or yes with it as before, so that the central bank can allow it to jump above that level without adopting measures to contain it.
In Oanda’s view, “The Federal Reserve will save the rate guidance update for another time, but for now it looks like rates are going nowhere until the 2024 election.” As the analysts of this firm point out, “the ‘Powell Put’ of keeping interest rates anchored for years has been consolidated” with the decision to allow inflation to exceed its target, something that leads to think that the Reserve Federal “is slowly becoming the Bank of Japan.”
And also the experts at Oxford Economics believe that Powell’s words suggest that there will be at least four years of low rates. In fact, they continue to forecast that the Fed will keep rates “at the effective lower bound until mid-2024.” However, at Phanteon Macroeconomics they are more cautious, believing that low rates will not last as long. In his view, “Powell and his colleagues have given themselves much more room to maintain zero rates and a bloated balance sheet for the next two years,” to give themselves time until the economy recovers from the shock caused by the pandemic. of Covid-19.
“With the adoption of the average inflation target and the move away from maximum employment as the main influence on monetary policy” (that is the other star measure announced by Powell), there has been a “seismic change in the strategy of the Federal Reserve”, For its part, Monex Europe states that “when the two changes are combined, the reaction function of the Fed is much smoother, since it is now much less likely that there will be preventive increases in interest rates in response to projected increases in inflation “.
For Kingswood analysts, the Fed’s measures “are an attempt to increase the effectiveness” of monetary policy, “which is compromised now that rates are so low.” Furthermore, they “make it even more likely that rates will remain at their current exceptionally low levels for years to come.”
QUESTIONS WITHOUT ANSWER
In Spreadex, they also point out that Powell’s lack of details about the Fed’s new strategy with inflation raises some unanswered questions and invites us to think that it will be at the next meeting of the central bank when things are finalized. “Much has been saved for the official meeting of the Federal Reserve in September,” remarks this firm.
In fact, in Markets.con they highlight that Powell and his team “keep their hands relatively free by not adhering to any specific formula related to inflation.” “There are not many details about how the Federal Reserve plans to get into the new framework. For example, if inflation is 1% for five years, does that mean that it will allow it to be 3% for the next five years?” ask the analysts of this firm. In his view, “Powell’s speech lacked details on the nature of the future direction towards which the Fed is clearly leaning, so it needs to be clarified at the next meeting in September.”
“There is no formula, so this gives the Federal Reserve some room for maneuver in terms of interpretation and something for the markets to worry about,” says manager Natixis IM. “In the absence of the speech, no specific new tools have been announced that, as we approach the lower zero rate limit, leave open the debate on the limitations of monetary policy. The Federal Reserve can continue to extract as much as it can, but it is necessary to pass the baton to the fiscal side to stimulate greater growth, “he adds.
At Oxford Economics they believe that by not making any mention of Powell implementing new policy tools to achieve the revised policy mandates, it appears that the Fed will “rely on its existing operating tools” that, when rates are at the effective lower bound, “They include quantitative easing (QE), forward-looking guidance and emergency loan facilities.” On the QE, these analysts believe “probable” the emphasis of the purchases of assets will change “towards the stimulation of the economy, instead of sustaining the operation of the market”.
Finally, IG points out that the central bank’s move is a “radical change”, since, in practice, it gives it “a free hand to carry out any monetary policy without worrying about the impact that inflation may have on the economy. short and medium term “.