• Latest
  • Trending
  • All

The market isn’t convinced the Federal Reserve can achieve its inflation objective

September 17, 2020 14:31
Equities struggle amid economic and China-related concerns

Equities struggle amid economic and China-related concerns

December 29, 2022 08:55
Dollar lacks upside momentum due to lower Treasury yields

Currencies stuck in ranges as New Year holiday looms

December 28, 2022 07:01
Stocks gain, dollar eases ahead of job market data

Dollar pressured by positive risk sentiment in thin markets

December 27, 2022 04:50
Dollar lacks upside momentum due to lower Treasury yields

Dollar tries to shrug off the pressure

December 26, 2022 05:13
Investors spooked by strong US data

Investors spooked by strong US data

December 23, 2022 11:55
Dollar lacks upside momentum due to lower Treasury yields

Dollar back under pressure after short-lived relief

December 22, 2022 05:17
Risk demand reemerges cautiously, but caution remains in place

Risk demand reemerges cautiously, but caution remains in place

December 21, 2022 08:49
Dollar lacks upside momentum due to lower Treasury yields

US dollar resists selling pressure

December 20, 2022 10:44
Market sentiment dented by recession fears

Market sentiment dented by recession fears

December 19, 2022 02:53
Dollar lacks upside momentum due to lower Treasury yields

Greenback stays on the defensive nearly across the board

November 16, 2022 05:34
Investor sentiment improves, but gains limited

Investor sentiment improves, but gains limited

November 15, 2022 05:46
Dollar lacks upside momentum due to lower Treasury yields

Dollar licks wounds after plunge

November 14, 2022 05:05
  • Terms & Сonditions
  • Contact
Tuesday, February 7, 2023
FWNews - pulse of the forex market
  • FUNDAMENTALS
    Equities struggle amid economic and China-related concerns

    Equities struggle amid economic and China-related concerns

    Stocks gain, dollar eases ahead of job market data

    Dollar pressured by positive risk sentiment in thin markets

    Investors spooked by strong US data

    Investors spooked by strong US data

    Risk demand reemerges cautiously, but caution remains in place

    Risk demand reemerges cautiously, but caution remains in place

    Market sentiment dented by recession fears

    Market sentiment dented by recession fears

    Investor sentiment improves, but gains limited

    Investor sentiment improves, but gains limited

    Risk sentiment keeps deteriorating, dollar climbs

    Stocks celebrate US inflation, dollar slumps

    Virus, US-China tensions hit global markets

    Market sentiment turns cautious amid events in the US

    Investors look indecisive ahead of another volatile week

    Investors look indecisive ahead of another volatile week

  • TECHNICALS
  • Interest Rates
  • Economic calendar
  • Backstage
No Result
View All Result
FWNews - pulse of the forex market
  • FUNDAMENTALS
    Equities struggle amid economic and China-related concerns

    Equities struggle amid economic and China-related concerns

    Stocks gain, dollar eases ahead of job market data

    Dollar pressured by positive risk sentiment in thin markets

    Investors spooked by strong US data

    Investors spooked by strong US data

    Risk demand reemerges cautiously, but caution remains in place

    Risk demand reemerges cautiously, but caution remains in place

    Market sentiment dented by recession fears

    Market sentiment dented by recession fears

    Investor sentiment improves, but gains limited

    Investor sentiment improves, but gains limited

    Risk sentiment keeps deteriorating, dollar climbs

    Stocks celebrate US inflation, dollar slumps

    Virus, US-China tensions hit global markets

    Market sentiment turns cautious amid events in the US

    Investors look indecisive ahead of another volatile week

    Investors look indecisive ahead of another volatile week

  • TECHNICALS
  • Interest Rates
  • Economic calendar
  • Backstage
No Result
View All Result
FWNews - pulse of the forex market
No Result
View All Result

Home » The market isn’t convinced the Federal Reserve can achieve its inflation objective

The market isn’t convinced the Federal Reserve can achieve its inflation objective

by FWNews
September 17, 2020 14:31
in News
0

For the past decade or so, the Federal Reserve has been quite effective in helping to create inflation, just not the kind that it normally targets.

The Fed’s perpetually easy monetary policy, consisting of historically low short-term interest rates and trillions of dollars in bond buying, has coincided with a huge swell in asset prices, stocks in particular.

What it has not driven is the kind of inflation central bank officials like to see – higher wage pressures, for instance, that help improve the standard of living as well as signal a vibrant economy not caught in the slow-growth trend that has persisted since the financial crisis.

The Fed is hoping to change that with a policy that it wheeled out in late August and codified Wednesday.

Instead of using interest rate increases to head off inflation before it hits, the Fed now will wait to hike until it sees inflation running persistently above the 2% target for an indeterminant period. While the move to “average inflation targeting” is in a respect historic for the Fed, market participants remain largely skeptical that the central bank can achieve its newly defined goal.

“Inflation has been an enigma for the Fed for a decade,” said Art Hogan, chief market strategist at National Holdings. “Clearly, there are certainly risks of creating asset bubbles with easy monetary policy. There doesn’t seem to be much risk of actual constructive inflation.”

Officially, the post-meeting statement said the Fed “will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.” Policy won’t change “until these outcomes are achieved.”

However, inflation didn’t even get past 2% when the U.S. economy was running with a 3.5% pre-pandemic unemployment rate, its lowest in 50 years. So investors could be forgiven for not expecting much from an economy with 8.4% unemployment, the decline of which historically has been an inflation sign though that relationship has broken down since the financial crisis.

None of the 17 officials on the Federal Open Market Committee see inflation breaking the 2% barrier through at least 2023. That means that the current near-zero short-term rate environment likely will persist for years before any change in the current structure would occur.

That poses problems on multiple levels.

Talk about bubbles

As Chairman Jerome Powell has spelled out repeatedly and reiterated during his post-meeting news conference Wednesday, low inflation generates low expectations which generate the low rates that Wall Street loves but that the Fed fears. Powell again stressed the limitations the zero-bound rates put on the Fed, which loses its ability to ease policy during times of stress.

Powell was asked during the news conference about the danger of asset inflation and financial instability, but expressed little concern about either at the moment.

Still, the talk of asset inflation, and a potential bubble, against economic disinflation will continue while the Fed stays near zero and inflation is mired well beneath the target rate.

“We know through the last 10 years that lower rates created asset inflation but not necessarily broad economic inflation. We need that component to be part of the discussion,” said Marvin Loh, senior global macro strategist at State Street. “I don’t think [a bubble] is a concern now. But it probably will be if this continues as we go into next year and probably 2022. They can look past it now given how many challenges they see in the economy.”

Indeed, at least from a valuation standpoint Powell has wiggle room left before he has to start worrying about a stock market bubble.

The current price-to-earnings ratio of the S&P 500, while elevated at 21.7, remains less than half the dot-com bubble levels around 46 in 2002.

Rather, the worry may be that the Fed has little else it can do except to keep pumping up the stock market and hope the economy follows.

Not much detail

The market didn’t know quite what to make of o, rising initially Wednesday before tailing off during Powell’s remarks and then sagging Thursday as investors wondered just how strong the Fed’s commitment is to economic inflation, and whether it can be effective.

After all, the change in approach on its face doesn’t seem that radically different from the former “symmetric” objective the Fed had to inflation, meaning it would allow for a miss on either side of the target. The difference is that this policy aims strictly for higher inflation, even if the details don’t seem to be ironed out yet.

Powell emphasized the need for fiscal help from Congress to support the recovery, though it’s still unclear what form that ultimately will take.

“There wasn’t much detail on how this would work,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “There’s some skepticism perhaps on a longer-term basis that they might be able to achieve that. That would then indicate that the Fed is essentially signaling that we can stay at the zero-bound interest rate until we do.”

Ma called it “quite a strange mismatch” that none of the Fed officials were anticipating inflation above 2% even in the longer run, though they do see the benchmark funds rate rising to 2%-3% over the long run from its current state near zero.

“Although we have the perfect setup for inflation – deglobalization, big tech breakup, higher wages – no one knows what actually drives inflation, and no one knows how to overcome huge demographic shifts that cause low inflation,” added Jeff Klingelhofer, co-head of investments and a portfolio manager at Thornburg Investment Management.

“The Fed’s I’ll-tell-you-when-to-stop-pouring approach to 2% inflation is just impossible,” Klingelhofer added. “Investors shouldn’t assume talk of inflation is monopolizing the Fed’s time, particularly since I don’t expect inflation to come into view until the end of 2021 at the earliest.”

If nothing else, though, the Fed’s policy should be market-friendly, Thursday’s adverse reaction notwithstanding.

Krishna Guha, head of central bank strategy at Evercore ISI, said the “whites-of-their-eyes” strategy on inflation is “unprecedented” and “is proof the Fed reaction function has changed. And it is bull fuel for the longer run.”

Share2Tweet1
ADVERTISEMENT
FWNews

FWNews

Track the pulse of the market

Related Posts

Equities struggle amid economic and China-related concerns
Fundamental analysis

Equities struggle amid economic and China-related concerns

December 29, 2022 08:55
16
Dollar lacks upside momentum due to lower Treasury yields
Technical analysis

Currencies stuck in ranges as New Year holiday looms

December 28, 2022 07:01
12
Stocks gain, dollar eases ahead of job market data
Fundamental analysis

Dollar pressured by positive risk sentiment in thin markets

December 27, 2022 04:50
12
Dollar lacks upside momentum due to lower Treasury yields
Technical analysis

Dollar tries to shrug off the pressure

December 26, 2022 05:13
12
Investors spooked by strong US data
Fundamental analysis

Investors spooked by strong US data

December 23, 2022 11:55
11
Dollar lacks upside momentum due to lower Treasury yields
Technical analysis

Dollar back under pressure after short-lived relief

December 22, 2022 05:17
16

Leave Your Opinion Cancel reply

Your email address will not be published. Required fields are marked *

Recommended

U.S. President Donald Trump speaks during a meeting with Leo Varadkar, Ireland’s prime minister, not pictured, in the Oval Office of the White House in Washington, D.C., U.S.

Trump cancels in-person G-7 meeting set for June at Camp David

March 20, 2020 09:58
22
Vaccine doubts curb investor optimism

Vaccine doubts curb investor optimism

November 27, 2020 04:56
20
Investors stay nervous as tensions escalate

Investors stay nervous as tensions escalate

February 23, 2022 08:49
11

Ads

Shneider Electric

Most Popular

A slow start to the week in FX markets
Technical analysis

Dollar regains ground to start the week

January 25, 2021 07:25
118
A slow start to the week in FX markets
Technical analysis

Greenback advances modestly amid strong data

May 28, 2021 07:38
110
Kim Jong Un reportedly says his nuclear weapons guarantee there will be no more war
News

Kim Jong Un reportedly says his nuclear weapons guarantee there will be no more war

July 28, 2020 08:29
95
FWNews

Copyright © 2022 FWNews

  • Terms & Сonditions
  • Contact
No Result
View All Result
  • FUNDAMENTALS
  • TECHNICALS
  • Interest Rates
  • Economic calendar
  • Backstage

Copyright © 2022 FWNews