As was made clear during the coronavirus crisis, the central bank’s influence now begins and ends with the financial markets.
The Federal Reserve is stuck. On its own, the only way forward is for Chair Jerome Powell to talk a good game. During a much-anticipated speech delivered virtually for the Kansas City Fed’s annual symposium traditionally held in Jackson Hole, Wyoming, Powell revealed changes to the central bank’s statement on longer-run goals and monetary policy strategy. The upshot — that the Fed would seek inflation that “averages” 2% over time, therefore allowing overshoots after periods in which it falls short of the target — was well-telegraphed to financial markets. Given the still-murky outlook for economic growth, it suggests interest rates could remain pinned near zero for the next several years. Traders in longer-dated U. S. Treasuries didn’t seem to know quite how to react to Powell’s speech, with the benchmark 10-year yield initially tumbling to 0.65%, on pace for the biggest drop in weeks, before breaking through a key support level to 0.74%, the highest since June. Thirty-year yields approached 1.5%, up from as low as 1.36%. Perhaps the confusion stemmed from Powell swinging back and forth on inflation himself. On the one hand, he emphasized that the central bank would no longer be dictated by a formula that balances employment and price growth, which, as my Bloomberg Opinion colleague Tim Duy eloquently put it, “throws the Taylor Rule into the dumpster.” That gives policy makers more discretion than before, which could make it more difficult for them to press pause on a hot economy.
