Fed Unanimously Approves Shift on Inflation Goal, Ushering in Longer Era of Low Rates

[mahatmakanejeeves]

Source: The Wall Street Journal.

Fed Unanimously Approves Shift on Inflation Goal, Ushering in Longer Era of Low Rates

Chairman Jerome Powell says central bank has changed how it views trade-off between lower unemployment and higher inflation

By Nick Timiraos
Updated Aug. 27, 2020 9:12 am ET

The Federal Reserve unanimously approved on Thursday a new strategy that will effectively set aside a practice it has followed for more than three decades to pre-emptively lift interest rates to head off higher inflation.

Fed Chairman Jerome Powell unveiled the updates in a speech set for delivery at a virtual symposium on Thursday, the most ambitious revamp of the Fed policy-setting framework since it was first approved in 2012. The practical effect is that it may be a very long time before the Fed considers raising interest...

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Read more: https://www.wsj.com/articles/feds-powell-headlines-virtual-jackson-hole-economic-conference-11598486400

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U.S. Stocks Tick Higher as Fed Signals Policy Shift

https://www.wsj.com/articles/global-stock-markets-dow-update-8-27-2020-11598519649

Jerome Powell was expected to offer insights into the Fed's monetary policy framework review

By Anna Hirtenstein
Updated Aug. 27, 2020 9:31 am ET

U.S. stocks edged higher Thursday after Federal Reserve Chairman Jerome Powell said the central bank would abandon its policy of pre-emptively raising rates to head off inflation.

The S&P 500 gained 0.2% a day after the stock index continued its advance to set its fourth-straight record close. The technology-heavy Nasdaq Composite Index rose 0.1% after notching an all-time high Wednesday. The Dow Jones Industrial Average added 0.3%, or 87 points. Gold futures, which often react to future inflation expectations, rose 1%.

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[bucolic_frolic]

1. If the Fed agreed on it, it must be 30 years too late

Fitting theory to reality is the domain of economists. That's why they can always support exploitation for the ruling classes.

[DeminPennswoods]

2. For now, this is not a bad change

It makes borrowing cheaper for individuals, businesses and governments that will need to do that in the near and medium term. IMHO, it's almost required for the economy to re-open post-SARS2.

[Yavin4]

3. It also means that your savings are worthless

And that you have to gamble in the casino (the stock market) in order to stay ahead of inflation.

[DeminPennswoods]

5. If interest rates are low, borrowing costs are low

Right now the danger of rampant inflation is low, too. It was the same situation after 2008. There was no COLA paid to federal beneficiaries (social security, CSRS/FERs, etc) for several years because it.

It's true anyone depending interest from a regular CD or savings account is hurt by this action, but then again since the 2008 crash, interest rates on savings accounts/CDs have rarely ventured above 2%.

Where I am, in the last 4 years, except for cable (half again higher) and phone/internet (up about 10%), all other utilities have been stable or lower on average.

Inflation that outpaces interest payments is what devalues savings. The Fed is not going to keep interest rates low if inflation begins to ramp up in a serious and sustained way.

[Yavin4]

7. "Inflation that outpaces interest payments is what devalues savings."

So, you don't have housing costs? Healthcare costs? Education costs?

Also, incentivizing people to be borrowers over savers is a recipe for disaster.

[Igel]

13. I do.

And while inflation chews into my retirement savings it reduces the actual cost of paying back the mortgage loan I have. House price might increase, but I'm still working and my employer's likely to try to at least match inflation.

At the same time, banks know this and will adjust rates on new mortgages (etc.) to match.

[DeminPennswoods]

15. Nope

No, no and no.

Of course I have to pay property tax and for part B of medicare, but those combined aren't onerous.

What the Fed is doing is smart because businesses that must borrow can do so at little to no cost. If they want to, say, inveest in upgrading their HVAC systems, they can do it without having to worry about their payments + interest.

[Yavin4]

9. This also hyper inflates the wealth of the 1%

High valued assets like real estate, certain stocks, etc. shoot up in value with low borrowing costs.

[StClone]

10. It all about the manipulating the Stock Market.

There are few investments now with which you get a good return because using cheap money, and in the Covid collapse, the one place to compete is in the Stock Market. Fighting dollars for stock is what is driving an over inflated market. Will this end in disaster? Working people own little stock except in "managed packages" of retirement (for which managers do quite well no matter the market). But will working people have to pick up the pieces as debt will pile on the U.S. to bail out again?

[packman]

4. A control on inflation is now gone?

That is not good

[marybourg]

6. Sure, tRump isa major borrower.

[maxrandb]

8. We better start buying some industrial size freezers for our homes

[machoneman]

11. Done solely to help the Republiscums and Trump win the elections. I am shocked as up until now....

...the Fed has not moved Trump's way. Instead, they have resisted and made changes based on their decisions.

Until now, that is.

The easily could have waited until Election Day +1. But oh no, doing so now does boost Trumpy's election chances.

Bastards!

[SWBTATTReg]

12. Perhaps a good thing, to shift focus from the jobless number (always push policies

to lower unemployment numbers) to a more focused, truly economic look at other factors, such as better utilization of resources (needed capital will flow to projects that require non-labor investments vs. labor intensive projects). Also, this shift may emphasize that lower employment numbers are probably here to stay, being that a robust economy will pick up laborers as needed and keep the jobless numbers low. Makes sense.

Contrary to what some may think (lower interest rates will be here to stay, and will keep interest rates low for those w/ savings, CDs, etc.), I don't think this will happen.

I think what will happen, is that markets will start driving needs for capital intensive projects, and thus, those projects that need capital will drive up interest rates (and thus be able to attract funds due to the higher interest rates), a good thing for savers, etc.

In short, or in other words, interest rates are driven upwards as competing demands for capital forces competition for a limited supply of capital.

Maybe this is the trigger to finally start getting a better return on our savings, etc., or even better prices for stocks, as they are forced to compete w/ higher interest rates in other investment classes (temporarily a damper on stock market prices until dividends are increased to compete).

And of course, the statement that those with assets will benefit from higher inflation ... probably so, but perhaps looking at asset classes back in the 1980s may offer a better clue to what will happen to these prices. What will happen is a more realistic approach to investing capital, as it should be. Don't just focus on one component of the economy (labor vs. all of the components of an overall project, etc.).

[NonPC]

18. Interesting Analysis, But...

The Fed can maintain any interest rate it wants, and will print as much money and buy whatever assets (bonds, stocks, etc) as needed to make that happen. As the saying goes, don't fight the Fed.

I don't think we'll see rates go above 1% until we encounter hyper-inflation from a massive devaluation of the dollar.

This train wreck is being brought to you by our "conservative" (Republican) members of Congress who will continue to deficit spend on corporate pork until the lights go out -- or the Democrats attempt to fix it.

Aren't we indebted to the tune of $300,000+ per US citizen already, with no end in sight and an economy that is broken for the majority of the poorer classes?

The Chinese are just waiting for us to get to the tipping point, then they will help nudge us over. Sure they have their own problems and sins too, but their stockpiling of real (not ETF) gold and gaining control of the world's raw materials sources in Africa and South America speaks volumes.

[SWBTATTReg]

19. Alternate sources of strategic minerals and metals are being developed due to a stranglehold on ...

these minerals and metals, so I don't think this will be a long term problem w/ the Chinese hoarding these strategic items, this has been going on for some time (development of alternate sources).

As to the Feds printing as much money and using it to buy unlimited amount of assets, I think their balance sheets (the Feds) is already flooded w/ debt issues and thus, they're trying to downsize these holdings too. Flooding the markets with more dollars will depreciate the dollar even more, who knows what the Fed wants?

The national debt will come back to bite people, eventually, but this will take time, for as interest rates remain low, then why not continue to borrow? When interest rates start going up, and the world's demand for dollars starts to shrink (and efforts are being made by other nations to use a basket of currencies to pay for oil (an example is the Saudi and the Russians getting together to do)), then perhaps a serious effort will be made to rein in debt issues. This is going to take a long long time to deal w/ this issue (massive debt). Perhaps spending (military) will be finally reined in, but I doubt it, the resolve to do so doesn't seem to be there.

Corporate debt remains a big hurdle, companies have been running to the piggy bank and issuing debt issues right and left, and with high stock market prices, companies don't seem interested in reducing the demand for debt issues and/or using their high stock prices to pay for debt/retire debt in exchange for stock.

In short, a big ol' mess.

[Politicub]

14. This is horrible for everyday citizens

The fed is encouraging inflation in order to create a cycle of borrowing and running up credit cards. It is turning the screws on ordinary people.

On edit: this is from an analysis that Reuters posted. I read it in Apple news so I don’t know how to link to it:

HOW WOULD IT WORK?

Since inflation has been undershooting 2% for years, the strategy signals that Fed policymakers won’t even think about raising interest rates until inflation overshoots their 2% goal for some period of time.

The idea is that if households and businesses are convinced inflation is headed higher, resulting in a reduction in their future buying power, they will take steps to borrow, spend and invest their money sooner.

That burst of early spending in a downturn should help create jobs and bolster demand, pulling the economy more quickly out of the doldrums.

The last paragraph — that this cycle of inflation would lead to more jobs — is magical thinking of the highest order.

[DeminPennswoods]

16. Here is how it works

Inflation is classically defined as too much money chasing too few goods. In other words, like in am auction, individuals, businesses and gov'ts start bidding against each other for goods/services thus driving up the prices. The Fed wants to keep that from happening.

What the Fed monitors is the full employment rate. If nearly eveyone who wants a job, has a job, then businesses start to compete for labor by raising wages and/or benefits thus raising their labor costs that they then pass along to consumers and other customers. Rising wages are good for labor, but if prices rise too much above the Fed's target inflation rate (2-4%), then the Fed will step in by raising interest rates to try and tamp down growth.

Until the epidemic hit, unemployment was very low and near what is considered full employment (4-5% unemployed). That's why we saw the Fed embark on a series of small rate hikes much to annoyance of Trump who wanted rates to stay low.

Right now, the Fed does not see inflation as a serious threat to the economy and, in fact, wants to encourage a moderate (2%+) level of it. Unfortunately, Monetary policy cannot pull the US out of recession if individuals, businesses and gov't don't want to borrow. During the Great Depression, interest rates were at 0, but no one had the financial wherewithal to borrow.

Hope that helps.

[roamer65]

17. M1 money supply is up by 40 percent YoY.

That’s called currency devaluation.

There will be higher inflation.