By Tom Burnett CFA
On August 27, 2020, Federal Reserve Chairman Jerome Powell delivered an online speech which describes a new approach to inflation, interest rates and employment. In his speech, Powell indicated that the Fed would no longer raise rates and slow the economy if inflation approached the 2% goal. The Fed will now take a measured approach looking at average inflation over a two or three year time span. This change strongly suggests that the Fed will keep short-term rates low for a longer time period. Many observers criticized the Fed for its aggressive moves to raise rates in 2018 as inflation began to approach the 2% target level. It now appears that the Fed will not be as inclined to raise rates even if inflation begins to rise above the target level. The Fed’s historic practice has been to begin to tighten policy as inflation first appears, but that policy now has been changed to a more flexible stance that will permit rates to stay lower than would have been possible under the previous policy goals.
The Fed has certainly done its part to offset the economic decline caused by the Covid-19 outbreak. The Fed has purchased Treasury and municipal bonds aggressively to keep rates low. The latest Fed balance sheet total assets now exceed $7.1 trillion, up from $3.8 trillion a year ago. With today’s announcement, most observers now expect that assets figure to continue growing substantially.
Tom Burnett CFA is Director of Research