This week’s most important even when it comes to the financial markets is the annual Jackson Hole Symposium. Even in an online format due to the coronavirus pandemic, this forum remains one of the most important fundamental events of the year because it will reveal more about monetary policy than any other announcement.
One reason why this year’s Jackson Hole gathering is more important than ever is the situation that the economy of the United States finds itself in at the moment. The coronavirus outbreak in the country has been longer and much more serious than expected at the start of 2020. More than 20 million people have lost their jobs, and over 14 million of those have been unable to find employment in the following months. GDP projections are at record lows as well. This is why experts have labeled the current crisis the worst recession since World War II.
Naturally, the coronavirus pandemic is expected to be the central theme of the symposium, since it poses the most immediate threat to the economy. But Covid-19 is already frequently featured in regular Federal Reserve meetings. In fact, grim prognosis for the economic recovery from the outbreak in the United States was featured in the minutes from the Fed’s most recent meeting and already caused the markets to turn pessimistic last week.
What is more important is that Federal Reserve Chairman Jerome Powell revealed more about the central bank’s long-term plans at the symposium. The Federal Reserve has been in the process of reviewing its overall approach to monetary policy since 2018, a review which will end soon. Powell used the symposium to discuss the main ways in which the Federal Reserve will change from this point forward.
Powell announced that the Fed will be moving away from its 2% inflation model. Over the past decade, 2% was seen as the ideal inflation rate. Interest rates were kept lower immediately after the 2008 crisis to support growth, but almost as soon as an inflation of 2% was reached, a new round of interest hikes began to prevent inflation from rising any further.
Interest rates in the US are currently close to zero, but unlike what happened when the previous crisis ended, the Federal Reserve will not touch interest even if inflation reaches 2%. Experts estimate that the Fed is likely aiming for a 2.5%-3% inflation rate and will keep its own interest rates close to zero for years to come. In addition, the Fed will also monitor employment very carefully to ensure inflation is not out of control.
More details on how the Federal Reserve plans to achieve its new targets will likely come after the central bank’s next policy meeting. But for now, the prospect of low interest rates and more economic stimulus is boosting stock indices and weakening the US dollar.
