- Fed Chair Powell has introduced a new policy framework, allowing for average inflation targeting as expected.
- Details are lacking, opening the door to inflation running hot.
- The bank will also prioritize employment over price rises.
The Powell Put is alive and kicking – Jerome Powell, Chairman of the Federal Reserve, announced a major dovish paradigm shift that may have a long-term effect.
Three dovish shifts from Powell
1) Average Inflation Targeting
The Fed will now allow for inflation to run above 2% to compensate for low inflation – that was expected but still implies a long-term change. Some skeptics stressed that the world’s most powerful central bank has been missing its inflation goal of 2%, so aiming for higher levels is meaningless.
Nevertheless, formalizing this shift – until the next review in five years time – gives market support and also pushes gold higher.
2) Lack of details – open-ended move?
At what level of inflation will the Fed hit the brakes? There is no answer to that. The lack of details means the bank seems to have lost its faith that prices may rise. Consequently, it would potentially ignore rising prices and let stocks and commodities overheat before understanding that it is too late.
The bank is all in.
3) Employment > inflation
The Federal Reserve had two mandates – full employment and price stability. It has now added financial stability as a third pillar. Yet, more importantly, it is further dismissing potential runaway prices by focusing on employment.
Powell has explicitly stated that ensuring low unemployment takes priority over price stability.
That is the icing on the cake that would mean lower rates for longer, weighing on the dollar.
Earlier, the first revision of US Gross Domestic Product for the second quarter beat estimates with a crash of 31.7% against -32.9% in the initial read.
Initial jobless claims came out at 1.006 million in the week ending August 21. Perhaps more importantly, continuing claims for the week concluding on August 14 – the week when Non-Farm Payrolls surveys are conducted – disappointed with 14.535 million. That implies an unimpressive jobs report next week.
Conclusion
The Fed is all in to support the economy, focusing on employment and ignoring inflation. That is positive for gold and stocks, detrimental to the dollar. The initial moves may be compounded by further moves later on.
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