Fed Chair Powell's Flexible Inflation Views Were Already Priced In

Federal Reserve Chair Jerome Powell did not raise many eyebrows Thursday morning when he announced the U.S. central bank would encourage some periods of inflation above its 2% target in certain circumstances to boost the long-term economy.

AccessTimeIconAug 28, 2020 at 3:30 p.m. UTC
Updated Sep 14, 2021 at 9:49 a.m. UTC
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Federal Reserve Chair Jerome Powell did not raise many eyebrows Thursday morning when he announced the U.S. central bank would encourage some periods of inflation above its 2% target in certain circumstances to boost the long-term economy. 

In remarks before a virtual version of the annual Jackson Hole symposium, Powell said the Fed was looking to bolster the labor market, though this is largely an issue Congress would have to deal with amid the ongoing COVID-19 pandemic. The current recession differs from most previous financial downturns because of its underlying cause; namely, lockdowns rather than the after-effects of an overheated economy, he said. 

“If inflation runs below 2% following economic downturns but never moves above 2% even when the economy is strong, then, over time, inflation will average less than 2%,” he said. “Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down.”

Powell added:

“To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2% over time. Therefore, following periods when inflation has been running below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time.”

Thursday’s new approach to monetary policy comes after a year-long review of the Fed’s previous strategy, Powell said.

Ben Emons, managing director at macro research firm Medley Global Advisors, told CoinDesk the speech and the Fed’s new framework “basically matched market expectations.” 

“For some time now the discussion has been moving to a more flexible framework targeting inflation,” he said. 

Market stability

Both traditional financial instruments and hedge assets ended Thursday’s trading sessions generally stable, despite some price fluctuation earlier.

While bitcoin saw a price spike during the first half of Powell’s comments, it returned to the low $11,000s by its conclusion, and was trading around $11,300 as of press time, down less than 2% over the past 24 hours.

Bitcoin's price was only down 1.84% around 4:00 p.m. ET Thursday, despite some volatility during Fed Chair Powell's speech.
Bitcoin's price was only down 1.84% around 4:00 p.m. ET Thursday, despite some volatility during Fed Chair Powell's speech.

Bitcoin's price rose to the mid-$11,000s on Friday, up just slightly over a 24-hour period.

Traditional financial markets also experienced some slight volatility, but closed their trading sessions less than 1% away from their starting points.

Employment concerns

Powell noted that Congress would have to target the unemployment rate, Emons said.

“So the message here today is really that if the economy recovers we’re going to see more inflation, and if employment improves we’re going to allow this to continue as long as possible,” he said. “The Fed’s not going to lean against it.”

During his speech, Powell said the labor market would be “strongly influenced by non-monetary factors” such as the path of the coronavirus and any lasting changes in the business landscape. 

For crypto traders, the big question will be how inflation impacts upon the prices of cryptocurrencies such as bitcoin and ether. Should the dollar weaken, the price of these cryptocurrencies should climb. 

However, Powell also addressed the trust factor when it comes to major centralized institutions like central banks.

“Public faith in large institutions around the world is under pressure,” he said. “I think institutions like the Fed have to aggressively seek transparency and accountability to preserve our democratic legitimacy.”

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