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UOB Group’s Senior Economist Alvin Liew, Head of Market Strategy Heng Koon How and Rates Strategist Victor Yong reviewed the recent speech by Chief Jerome Powell at the Jackson Hole Symposium.

Key Quotes

“FOMC Chair Jerome Powell used this year’s virtual Jackson Hole Symposium to announce a new approach to US monetary policy setting.”

“Following nearly one and half years’ period in conducting the first-ever public review of US monetary policy framework, the Fed formally announced (27 Aug 2020) it will adopt a new strategy of Average Inflation Targeting (AIT) and put emphasis on “broad and inclusive” employment. It also recognized the challenges for monetary policy posed by a persistently low interest rate environment.”

“The most straightforward conclusion for the FOMC outlook is that with the new AIT strategy, the Fed is now seen as willing to allow inflation to run hotter than normal (i.e. 2%) in order to support the labor market and broader economy, a landmark shift to prolonged low rates era.”

“Despite the Fed adopting AIT, the strategy on its own does not boost inflation so the US is still beholden to developments in COVID-19 and prospects on economic recovery to provide an uplift to inflation expectations.”

“Post AIT curve steepening is underpinned by real yields. Whether AIT results in higher long term inflation depends also on perceptions of Fed’s credibility.”

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