Fed Note:
The Federal Reserve Open Market Committee took no action at their mid-September policy meeting, as expected, leaving the fed funds rate at the zero bound of 0.00-0.25%.
Lately, the action seems to be happening between meetings. The Fed announced a new inflation targeting policy that will utilize an ‘averaging’ method based on recent inflation trends as opposed to the simpler meeting-by-meeting assessment. This will now allow for some drift in permitted inflation above target that would help ‘make up’ for periods of weakness during the pandemic. Presumably, inflation would end up being somewhat symmetrical over time around the 2.0% target, but the main concern is low current levels. The low rate regime also pressure the dollar lower, which has some economic benefits and tends to ease policy further if successful. The key question from economists is whether it will work to stoke inflation as intended.
Today’s formal statement changed quite dramatically in language, and materials noted the changes regarding its new inflation stance, showing interest rate forecasts on hold through 2023. The 2020 economic decline of -6.5% previously noted, was now raised to only -3%. There were two dissents in the meeting, about language and long-term intentions rather than current actions—seeking more flexibility about future policy decisions as inflation and growth conditions evolve, as opposed to appearing ‘boxed in’ with the newer policy of letting inflation run higher than target. Overall, the statement was seen as dovish.
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