FOMC Meeting Last Week Offered Little Support To Risk Assets

The US Central Bank emphasised that it has a powerful new monetary policy road map for returning the US to full employment and lifting inflation temporarily above 2%. Is the market convinced by this ambitious goal?

Confronted by a pandemic that has devastated the economy, Federal Reserve Chair Jerome Powell declared no less than 10 times last week that the central bank has a powerful new monetary policy road map for returning the US to full employment and lifting inflation temporarily above 2%.

This target was questioned by analysts and investors, including Mellon chief economist Vincent Reinhart.

Such scepticism, which was partly reflected in falling stock prices towards the end of last week, could prove to be a headwind for the Fed. If consumers and companies doubt its ability to achieve its aims, they’re likely to be more risk averse, holding back the economy in the process.

To counteract that, more specific policy commitments by the Fed, including asset purchases and getting more help from Congress on fiscal policy, may be needed.

The Fed said it expects to hold interest rates near zero until the labour market has reached maximum employment, inflation has hit 2% and is on track to moderately exceed that for some time. Policy makers also predicted that rates will stay near zero at least through 2023, the last year of the Fed’s forecasting horizon.

Pursuing the 2% goal

In the press conference last week on September 16, Powell acknowledged that the new monetary message was unlikely to have a big reaction right now and said the Fed could probably use some more help from Congress in resuscitating the economy from the damage done by Covid-19.

What’s more, the Fed’s updated framework gives it a lot of leeway in meeting its average 2% inflation target. While that flexibility could prove valuable in steering the economy, it raises questions about how serious the Fed would be in pursuing that goal should other events intervene.

1 2
View single page >> |

Disclaimer: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.