TAKING MONETARY POLICY TO
YET ANOTHER LEVEL

The presentation of the new Long Term goal and strategy on August 27 marks a deep shift in the Fed’s monetary policy. The new way inflation and the labour market will affect monetary policy will result in a marked downward bias to interest rates.

Highlights:

  • In its recent strategy review, the Fed formalised its shift to a structurally more accommodative policy stance. It will now target average inflation rate over a prolonged period and will consider only negative deviations from full employment.
  • The low growth, low rates environment reduces the potency of the federal funds rate as an instrument, and requires a more intensive use of other tools like bond purchases. Given the expected slow rebound in inflation, we do not expect any rate hike from the current zero level before at least end-2024.
  • At its recent (Sept 16) meeting, the Fed clearly stated that there will be no rake hike until the economy is at full employment and the inflation is steadily at 2%. No guidance was provided on QE are likely.
  • We expect the ECB to embark on additional policy measures at its December meeting. Its strategy review will likely endorse a symmetric inflation target, a higher role of underlying inflation and possibly average inflation targeting.
  • Being rather at its policy limits, the BoJ concentrates on supporting fiscal policy and funding for lending.

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