Amid the Coronavirus pandemic the Jackson Hole Economic Symposium is being hosted via webcast and is freely available for all to watch, for the first time since the gathering began in 1978. Markets appeared jittery ahead of Fed Chair Powell’s speech on the central bank’s monetary policy framework review yesterday. Powell announced a fresh long-run monetary policy strategy, or as he put it “a robust updating”, which would allow inflation and employment to run at much higher levels, suggesting that interest rates are to stay lower for longer.
Following the year-long review, the Fed announced the adoption of an "average inflation target". This suggests, as has been discussed by many Fed members over the past months, that the inflation target will be allowed to overshoot following periods of weakness without any pressures to hike rates. Since the 2% target level was established in 2012, the Fed’s favoured measure has averaged just 1.4%. Clearly the Fed is not in any rush to hike rates any time soon, however, Powell did note that “if excessive inflationary pressures were to build or inflation expectations were to ratchet above levels consistent with our goal,” the central bank would act. We currently see limited inflationary pressures. Even the slightest mention of the Fed looking to a more relaxed approach to inflation spooked the UST curve which rapidly steepened. Asian curves also steepened earlier this morning following the Fed update. Meanwhile equity markets resumed their upward trend, having broadly held-off ahead of Powell’s speech, and strangely the VIX Index, a fear gauge, spiked up a further 5.16% on top of Wednesday’s 5.63% jump. In terms of the labour market, Powell said “Maximum employment is a broad-based and inclusive goal,” adding, “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.” Faced with what the Fed Chair cites as “a couple of years, at least,” of “relatively high unemployment”, Powell stated that "It is hard to overstate the benefits of sustaining a strong labor market, a key national goal".
The ECB’s chief economist Philip Lane, who spoke after Powell, discussed crisis management. He said “The monetary policy challenge consists of two stages.” He noted that: “Once the negative shock has been sufficiently offset, the second stage is to ensure that the post-pandemic monetary-policy stance is appropriately calibrated in order to ensure timely convergence to our medium-term inflation aim.” Lane also mentioned that the ECB is currently reviewing its monetary strategy, and thus the way it looks at maintaining price stability, which is currently way below the target of keeping inflation just below 2%. Having announced a further asset-purchase program which would look to lend support to regional financial markets and counter any downside risks to price stability amid the pandemic induced crisis, Lane noted that “The ECB Governing Council stands ready to adjust all of its instruments, as appropriate”. Adding, “The emerging lessons from the policy response to the pandemic shock will also feed into our monetary-policy strategy review.” Meanwhile, Francois Villeroy de Gathau, a member of the ECB’s Governing Council stated “It is essential to have an inflation target,”, adding, “I won’t say what form it will take for us, I won’t anticipate the result. But you can be reassured that a credible and symmetrical inflation objective will remain at the heart of our action.”
Closer to home we anticipate the Bank of England Governor Andrew Bailey’s speech later today, any hits of negative rate policy will be monitored very closely.