How Will the Fed’s New Inflation Target Impact Interest Rates?

Chairman of the Federal Reserve Jerome Powell announced the results of the year and a half long monetary policy framework review, and while it was somewhat telegraphed, it’s important for the path of interest rates.

Fed to target 2% average inflation over time

The Fed has a 2% inflation target, but actual inflation has averaged about 1.6% over the past 5 years, and has exceeded the 2% target only 13% of the time over that span. Going forward, the Fed will take into account those misses when setting monetary policy and attempt to target an average inflation level of 2% over time.  

Rates at zero for how long?

While there are many fine academic points to debate in ivory towers across the country, the market implications are clear: the Fed will keep rates at zero for a long time. How long is a long time? Unclear. But the next scheduled framework review, due in 5 years, is a logical timeline.

Implications for investors

Clearly the Fed is only one part of what drives asset market returns, but this review indicates that their policy stance going forward will be easier than it otherwise would have been. This is broadly supportive for equity and credit markets, negative for the dollar, and should weigh on long-end interest rates. To download a copy of this commentary, click the button below.

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