At the meeting of the US Federal Reserve yesterday, Wednesday, the focus was on the strategic shift announced by Jerome Powell two weeks ago. The aim was to specify the adjusted “flexible average inflation target” of 2%. In addition, there were updated projections – for the first time until 2023. As expected, the upper range of the key interest rate remains at 0.25%. It was the last FOMC meeting before the November 3rd presidential election.
A number of changes were made in the statement, but above all the realignment: The key rate will remain at 0.25% until “maximum employment” is reached and inflation “has risen above 2% and this mark is moderate for is exceeded for a certain time ”. This statement leaves the Fed a lot of leeway in its argumentation in the future. In any case, the central bank will be able to deliberately ignore base effects or special effects in price developments. Inflation data can be pushed aside up to almost 3%. This realignment is unlikely to impress the markets at the moment, as the subject is more likely to be disinflation than inflation. In a few years, however, it can become a game of trust if the Federal Reserve fails to take countermeasures for (too) long.
The updated projections indicate that the median of the FOMC members does not see any change in interest rates up to and including 2023: Only 4 out of 17 expect an interest rate hike by the beginning of 2024. The interest rate projections have thus basically become irrelevant and meaningless for the foreseeable future. At this point in time, inflation is expected to be 2% and the unemployment rate is already expected to be back to 4%.
At the press conference that followed, Jerome Powell noted that the economic recovery was faster than was generally expected, but that the way forward was completely uncertain. Jerome Powell tended to make dovish statements about the realignment. The central bank seems to strive for an expansionary monetary policy until the last person who has become unemployed as a result of the crisis finds a job again. Powell emphasized that the labor market – unlike inflation – could not be reduced to a single number. In our opinion, this of course opens up complete freedom of action in perspective: only the inflation rate should not be well above 2% for several quarters, otherwise the Fed will simply wait and see.
Furthermore, the motto for monetary policy is to do everything possible to combat the crisis. In particular, it observes what fiscal policy brings about. But negotiations about the support programs for employees affected by the coronavirus, which expired weeks ago, are stalling. Compromises in Congress have not yet been found. Many of the citizens registered as unemployed have to forego government support. Who is being blamed for this? The people can judge this in the presidential election on November 3rd.
Conclusion: At its meeting yesterday, the US Federal Reserve officially implemented the realignment it had already announced: To combat the crisis, interest rates will remain unchanged at 0.25% until “maximum employment” has been reached and inflation is on the way To “moderately exceed” the target of 2 percent “for some time”. The updated interest projections indicate that the median of the FOMC members sees no change in interest rates until the end of 2023: only 4 out of 17 expect an interest rate hike in 2023. At this point in time, the FOMC members see inflation at 2% and the unemployment rate already at 4 %. Ultimately, this completed strategic shift opens up almost complete freedom of action for the Fed for an indefinite period of time, as the factors for action were formulated so vaguely that they leave a lot of room for interpretation. At the moment it should basically still have few real economic implications – but in the long term the Fed is now putting the trust it has placed in it. That is now the most important thing she has! Instead of “Low for Longer” it is now almost “Low for Ever”.
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