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Immovable rates until 2024 and free way to inflation: this is how the market interprets Powell

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"Authentic turning point" or "historical discourse" are some of the qualifiers that analysts have uttered after hearing the words of Jerome powell, Chairman of the Federal Reserve (Fed), in Jackson hole. Much was expected of him and he has not disappointed. In fact, the market is clear about its interpretation of an intervention that "will be remembered for years to come": interest rates will remain low minimum until 2024 and the central bank will have freeway with inflation.

"In essence, interest rates will stay close to zero for a long, long time," say Spreadex experts, referring to the consequences of the Fed's decision to set a 2% inflation "average target", and not having to comply yes or yes with it as before, so that the central bank can allow it to jump above that level without adopting measures to contain it.

In Oanda's view, "The Federal Reserve will save the rate guidance update for another time, but for now it looks like rates are going nowhere until the 2024 election." As the analysts of this firm point out, "the 'Powell Put' of keeping interest rates anchored for years "with the decision to allow inflation to exceed its target, something that suggests that the Federal Reserve "is slowly becoming the Bank of Japan".

And also Oxford Economics experts believe that Powell's words suggest that there will be at least four years of low rates. In fact, they continue to forecast that the Fed will keep rates "at the effective lower bound until mid-2024." However, at Phanteon Macroeconomics they are more cautious, believing that low rates will not last as long. In his view, "Powell and his colleagues have given themselves much more room to maintain zero rates and a bloated balance sheet for the next two years," to allow time for the economy to recover from the shock caused by the pandemic. of Covid-19.

"With the adoption of the average inflation target and the move away from maximum employment as the main influence on monetary policy" (that is the other star measure announced by Powell), there has been a "seismic change in the strategy of the Federal Reserve", For its part, Monex Europe believes that "when the two changes are combined, the reaction function of the Fed is much smoother, since preventative interest rate hikes are now much less likely in response to projected increases in inflation. "

For Kingswood analysts, the Fed's measures "are an attempt to increase the efficiency" of monetary policy, "which is compromised now that rates are so low." Furthermore, they "make it even more likely that rates will remain at their current exceptionally low levels for years to come."

QUESTIONS WITHOUT ANSWER

In Spreadex, they also point out that Powell's lack of details on the Fed's new inflation strategy It raises some unanswered questions and invites you to think that it will be at the next meeting of the central bank when things get done. "Much has been saved for the official meeting of the Federal Reserve in September," remarks this firm.

In fact, in Markets.con they highlight that Powell and his team "keep their hands relatively free by not adhering to any specific formula related to inflation." "There are not many details on how the Federal Reserve plans to get into the new framework. For example, if inflation is 1% for five years, does that mean that it will allow it to be 3% for the next five years?" ask the analysts of this firm. In his view, "Powell's speech lacked details on the nature of the future direction towards which the Fed is clearly leaning, so needs to be clarified at the next September meeting".

"There is no formula, so this gives the Federal Reserve some room for maneuver in terms of interpretation and something for the markets to worry about," says manager Natixis IM. "In the absence of the speech, no new specific tools have been announced which, as we approach the lower zero rate limit, leave open the debate on monetary policy limitations. The Federal Reserve can continue to take out everything it can, but it is necessary to pass the baton to the fiscal side to stimulate further growth, "he adds.

At Oxford Economics they believe that by not making any mention of Powell implementing new policy tools to achieve the revised policy mandates, it appears that the Fed will "rely on its existing operating tools" that, when rates are at the effective lower limit, "they include quantitative easing (QE), forward orientation and emergency loan facilities." On the QE, these analysts believe "probable" the emphasis of the purchases of assets will change "towards the stimulation of the economy, instead of sustaining the operation of the market".

Lastly, IG points out that the central bank's movement is a "radical change", since, in practice, it gives it "a free hand to carry out any monetary policy without worrying about the impact that inflation may have on the economy. short and medium term ".

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