Federal Reserve's Jerome Powell announces new approach to stimulating US economy – as it happened

Jasper Jolly

from on 2020-08-27 14:55 (#57D24)

Rolling live coverage of business, economics and financial markets as central bank says it will tolerate inflation above 2%

3.55pm BST

Long anticipated, Federal Reserve chair Jerome Powell has delivered a new approach to monetary policy for the central bank: it will tolerate inflation rising above 2% for short periods of time.

This means the Fed will likely be more comfortable keeping its extraordinary stimulus measures in place for longer as it waits for the labour market to heat up and the economy to recover.

Investors have been worried that changes to monetary and fiscal policy raise inflation risks in the future - but we think these concerns are overblown. Our view is the Fed's adoption of average inflation targeting today - which entails periods of above target inflation when the economy is at full employment to compensate for time spent below target - is likely to raise average inflation over the cycle only modestly.

If signs of runaway inflation emerge we expect the Fed will be quick to act, but we don't believe we are there yet. For the time being the Fed has plenty of reasons to keep policy accommodative given weak demand and elevated unemployment.

3.18pm BST

The Fed's new statement on its longer-run goals now notes the central bank's monetary policymakers seek to achieve inflation that averages 2% over time" and that following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time."

Paul Ashworth, chief US economistat Capital Economics, said this will mean targeting a higher rate of inflation in reality, but whether a higher bar means they can jump further remains to be seen. Ashworth said:

With long-term interest rates already so low and the Fed still ruling out negative rates as undesirable, we don't expect that additional stimulus to provide any significant boost to the real economy, which means the Fed might struggle to hit its 2% inflation rate at all, let alone deliver above-target inflation.

The policy is deliberately vague, however, with Powell not clarifying exactly how high inflation would need to get before FOMC officials did become uncomfortable.

3.04pm BST

But where exactly is this inflation going to come from?

Neil Williams, a senior economic adviser to Federated Hermes, said:

Chair Powell's comments formalise what the Fed has been doing for 18 months, and confirm his frustration that better growth doesn't necessarily mean an inflation lift-off.

In theory, by pursuing an average, rather than fixed, inflation target, he can allow it to travel beyond its preferred 2% destination before tightening rates. This should give the recovery extra room to breathe. The challenge, though, will be getting the inflation train to get that far, given the disinflationary forces still working the other way, including slow labour recovery, sluggish productivity, and, in a liquidity trap, growth's insensitivity to low rates.

3.03pm BST

Jerome Powell has now finished speaking. And just as he does the Dow Jones industrial average turns positive for the year - a symbol of the support that he and the central bank have given to equity markets since the pandemic began.

The main event was of course the new determination to tolerate inflation above 2% for some time if it helps the labour market to recover. It came after a detailed review of the monetary policy framework that began well before the pandemic.

This more relaxed view on inflation will reinforce the notion that rates will remain pinned at these rock-bottom levels for an extended time - which will be instrumental in guiding the economy back to health and acting as a key source of support for risky assets in general.

Indeed, the subsequent output gap and the elevated level of unemployment stemming from the economic stop in March and April will keep inflation pinned lower and allow central banks to pursue extremely accommodative monetary policies for the foreseeable future, with the end result being a strong, above-trend growth cycle that will follow for the next several years as the central bank focusses on closing that gap in the economy.

The Fed has moved to a more relaxed approach to inflation, looking at an average of 2% rather than a target, earlier than expected. This has come as it acknowledges the challenges of persistently low rates and suggests that it's possible to have a robust jobs market without inflation. There's not a lot in this for markets to get excited about.

2.53pm BST

If we can keep the disease under control we can help the economy to recover, Powell says.

But we need to support workers in sectors that are most affected, Powell says. There might be stop and starts in general recovery, but there could be a long tail" of people who are left out for at least a couple of years, he says.

2.49pm BST

Some responses from economists and commentators:

Even more central bank stimulus:
That's what #markets--across the board--have taken away, at least for now, from #Fed Chair #Powell's remarks on changes to the #MonetaryPolicy framework.
With that, the initial reaction is a la #MMT: higher prices for #stocks, #bonds, #gold, etc

Powell speech: Implication for stocks. Stock traders have fairly straightforward view of Fed changes:
1. Low unemployment not spurring inflation
2. Rates lower for longer
3. May have higher levels of inflation without Fed raising rates
4. Positive for stocks@CNBC

Another comment about the new Fed policy strategy and Powell's Jackson Hole speak: I am struck by how effective communicator Powell is. He is able to explain the framework, which some expected to be a major communication challenge, in simple straightforward terms.

2.45pm BST

Powell has been asked what the Fed can do to help racial equality.

The effects of the pandemic have fallen to a large extent on service jobs with low wages, and this is heavily skewed towards women and minorities, Powell says.

We really need it to be broader than just the Fed.

2.42pm BST

The new policy does not dictate particular outcomes, Powell says.

It's part of a broad programme to aggressively seek" transparency and accountability, Powell says.

The rules" versus discretion" debate is now over. Discretion wins as Powell throws the Taylor Rule into the dumpster.

2.34pm BST

They aren't huge moves, but stock markets on Wall Street have opened at new record highs.

2.32pm BST

Q: On the new average inflation targeting strategy, how will this be communicated and how will it change things?

Public communications are very important, Powell says.

2.29pm BST

Powell says the central bank will engage in regular reviews of monetary policy roughly every five years, and with that he is finished - but there is a Q&A coming up (via a rickety connection with the questioner).

2.27pm BST

It is a robust updating of our monetary policy framework, Powell says.

The bank will be highly focused on fostering as strong as labour market as possible for all Americans, as well as steady inflation over time.

2.26pm BST

To counter the risks of running out of firepower the bank is prepared to use the full range of tools, Powell says.

A robust job market can be sustained without an increase in inflation, Powell says - unlike in the past.

2.22pm BST

And it looks like equities are getting a boost.

****#NDX 12,000***

Nasdaq soaring on Powell comments - futures imply cash open above 12000 handle:#NASDAQ 12016 +0.39% pic.twitter.com/kVZLswB5nZ

2.20pm BST

The dollar is weakening as Powell speaks (with a dovish message so far).

US DOLLAR INDEX DECLINES TO 92.67, EURO JUMPS TO $1.1870 AFTER POWELL COMMENTS

2.19pm BST

Longer-term inflation expectations may have been holding down inflation more than expected, Powell says.

Persistently low inflation is a cause for concern". It can cause a serious risk for the economy and a adverse cycle" of ever lower inflation expectations.

2.16pm BST

There have been four main developments in understanding of monetary policy, Powell says:

2.11pm BST

Inflation targeting has had an emphasis on transparency, showing the understanding that public communication is important for monetary policy, Powell says.

Powell is summarising the development of the inflation targeting regime through previous chairs.

2.08pm BST

The Federal Reserve's monetary policy framework must adapt, Powell says.

2.03pm BST

Jerome Powell will be starting in less than 10 minutes.

You can watch an introduction followed by his speech live here:

1.52pm BST

The level of initial jobless claims was 1,006,000, a decrease of 98,000 from the previous week's revised level, according to the US Department of Labor.

The four-week moving average for new jobless claims was 1,068,000, a decrease of 107,250 from the previous week.

1.46pm BST

The US Bureau of Economic Analysis (BEA) said the slightly better GDP reading was down to private inventory investment and personal consumption expenditures (PCE) decreas[ing] less than previously estimated".

However, even with the tinkering in the revisions the figures still show a historic drop in US output in the second quarter.

The decrease in real GDP reflected decreases in PCE, exports, nonresidential fixed investment, private inventory investment, residential fixed investment, and state and local government spending that were partly offset by an increase in federal government spending.

1.40pm BST

The FTSE 100 has nudged into positive territory in recent minutes but US stock market futures have held their losses ahead of Wall Street opening.

1.38pm BST

The US economy shrank at an annualised rate of 31.7% in the second quarter of 2020 as the coronavirus pandemic hit, a slightly smaller contraction than the 32.9% rate reported initially.

Another 1.006m Americans made initial claims for unemployment benefits in the week to 22 August, in line with expectations but highlighting the difficulties facing the US labour market.

12.55pm BST

With about 90 minutes until Jerome Powell starts talking, European stock markets are suffering something of a dreary day.

The FTSE 100 has dipped by a paltry 10 points to 6,035, a decline of 0.2%. France's Cac 40 has lost 0.5% and Germany's Dax has lost 0.3%, contributing to a 0.3% decline for the broad blue-chip Euro Stoxx 600 index.

12.47pm BST

Locked-down punters swapping sports betting for online poker and casino games during the coronavirus crisis helped the Paddy Power and Sky Bet owner, Flutter Entertainment, to report better-than-expected profits in the first half of 2020.

The world's largest online betting company, created via the $12bn (9.1bn) merger of Flutter and Canada's The Stars Group, said pre-tax profits fell by 70% to 24m in the six months to the end of June.

11.52am BST

Something to sink your teeth into before lunch: more discounts on dining out.

11.35am BST

Mark Haefele, chief investment officer, UBS Global Wealth Management, said:

While we expect the Fed to shy away from more radical easing measures, such as explicit controls on government bond yields, we believe Powell will likely outline other dovish measures. These could include a move toward average inflation targeting, giving the central bank more leeway to allow inflation to overshoot the 2% target while keeping rates pegged close to zero.

Maybe the age of the independent, activist central bank head is also coming to an end. Fiscal policy is more powerful and monetary policy needs to work in harmony with it. Monetary policy is being asked to do things (like tackle economic inequality) that it really isn't suited to. But, here we are, waiting for Jay Powell to turn up at Grafton's Saloon. He's already done everything he can, he's almost out of bullets and he may even have already won the fight, but we have placed our faith in him and desperately want fresh encouragement.

11.01am BST

The Fed has really been the dominant force in markets since the pandemic started. It laid on trillions of dollars of support for assets in the form of quantitative easing stimulus and opened the dollar taps as demand for the reserve currency rocketed during the panic.

However, there are concerns that it is running out of firepower to stimulate the US economy (which is why central bankers have been so keen for fiscal stimulus since the financial crisis).

It has been widely speculated that the Fed will soon strengthen their forward rate guidance in response to the review to signal that rates will remain on hold for much longer into the economic recovery than during past economic cycles. The Fed is expected to signal a greater tolerance for allowing inflation to overshoot their target for a period perhaps through adopting a form of average inflation target.

Another potential focus could be any updated views on the effectiveness of other policy tools such as yield curve control whereby the Fed contemplates capping yields, although recent comments suggest it is unlikely to be implemented at the current juncture.

10.58am BST

The FTSE 100 has lost further ground this morning - it's now down by 0.5% - but most investor focus is on what is to come later, when Federal Reserve chair Jerome Powell addresses the virtual Jackson Hole conference.

Market expectations are for a dovish Powell with the consensus view that Powell would unveil (or strongly hint) at the flexible inflation targeting framework. The new framework would allow for a short term overshoot in inflation above the target, and hence allow the Fed to keep accommodative policies for longer. We expect Powell to broadly outline the Fed's thinking around inflation targets and the rationale for a shift in the framework but refrain from providing exact details.

Given that the consensus view is already on the dovish side, it would be difficult for Powell to beat the current expectations. Risks that the Powell's tone, though dovish, fails to live up to current market expectations, which could be negative for risk sentiment.

9.59am BST

The pandemic caused a surge in online shopping in many major markets, and particularly for groceries that had seemed (oddly) resistant to the trend before then.

But Delivery Hero - a German rival to Anglo-Dutch Just Eat Takeaway, the UK's Deliveroo and the US's Uber Eats - clearly thinks it will be a growth area: it announced a $360m (270m) deal for InstaShop, a grocery delivery company.

.@InstaShopUAE, the Greece-headquartered on-demand grocery is acquired by Delivery Hero for $360M Great news for the team, investors @VentureF_VC & the Greek ecosystem overall, as we're talking about the country's biggest tech exit yet according to TC.https://t.co/xSShYi4YQj

9.51am BST

One of the big business news stories from earlier this morning was the resignation of the boss of TikTok, the Chinese social network that has found itself at the middle of a geopolitical struggle.

9.41am BST

There's more from WPP, the world's biggest advertising agency, which announced a big writedown on the value of previous acquisitions, and a big loss, but still beat market expectations.

Chief executive Mark Read was speaking to reporters this morning. Asked if the multi-billion pound write-down was the fault of Sorrell, who has always had a penchant for making the big deal, Read said:

I don't think we are saying that. It relates primarily to Y&R Group, before my time, which was acquired in 2000 at the height of the market in a stock transaction when both Y&R and WPP group's stock were also high.

9.18am BST

The mid-cap FTSE 250 index is mostly flat this morning, but one stock is flying: mortgage specialist OneSavings Bank is up 18%.

The bank said it was encouraged by the recovery in application volumes for our products since the housing market reopened", running at about 60% of pre-lockdown levels on tighter lending criteria and higher pricing.

We expect to deliver double digit underlying net loan book growth for the full year.

While we are more cautious than consensus on impairments, we still see upside in the name given return on tangible equity delivery and the very strong capital position [...] Clearly, OSB has considerable headroom to cope with any negative shocks in an asset quality context as furlough schemes are tapered. We remain positive on the name.

9.00am BST

Another data point for investors and central bankers to add to the mix from earlier: an apparently strong rebound from Chinese industry.

China was of course by all indications the source of the coronavirus outbreak, but a very strict lockdown relatively early on has meant that much of its industry has reopened.

Profits at China's industrial firms grew for a third straight month in July and at the fastest pace since June 2018, marking a bright spot in the economy as the manufacturing sector slowly recovers from its coronavirus slump.

Profits at China's industrial firms grew 19.6% on-year to 589.5 billion yuan ($85.58 billion), the statistics bureau said on Thursday, following an 11.5% increase seen in June, the National Bureau of Statistics (NBS) data showed on Thursday.

8.56am BST

The eyes of the oil industry are on the US east coast at the moment to see what will happen with Hurricane Laura and its effect on production, but in the UK there has been another reminder of the chaos in the industry as prices have plunged.

British oil well drilling tools company Hunting has revealed that it has cut 624 jobs during the first half of the year with the closure of multiple sites in the US.

8.45am BST

WPP has reported a 2.6bn loss in the first half after the impact of the pandemic prompted the company to wipe billions off the value of expensive advertising acquisitions made by founder and former chief executive sir Martin Sorrell.

Assuming there is no second wave nor major lockdowns, the second quarter is expected to be the toughest period of the year, although we remain cautious on the speed of the recovery.

8.31am BST

Stock markets have also retreated across Europe after an initial flurry of positivity (in Germany and France at least).

The Euro Stoxx 600 index, which tracks most of the biggest European companies, is down by 0.2%. Germany's Dax is down by 0.1%, France's Cac 40 has lost 0.3% and Italy's FTSE MIB has lost 0.7% in early trading.

8.25am BST

Jet engine manufacturer Rolls-Royce is the biggest faller on the FTSE 100 after revealing a 5.4bn loss and a plan to sell assets to shore up its creaking balance sheet.

8.04am BST

Good morning, and welcome to our live coverage of business, economics and financial markets.

It is the day investors have been looking forward to throughout August: US Federal Reserve chair Jerome Powell will make a much anticipated speech in which he is expected to address the central bank's future approach to monetary policy.

There is an element of caution among investors as the Fed chairman, Jerome Powell, will deliver a speech on a monetary policy framework later today. Dow Jones and the S&P 500 futures are likely to experience higher volatility on the back of this. The future of the coronavirus stock market rally is highly dependent on the Fed's monetary policy stance.

Hurricane #Laura Advisory 29A: Extremely Dangerous Category 4 Hurricane Laura Makes Landfall Near Cameron Louisiana. Catastrophic Storm Surge, Extreme Winds, and Flash Flooding Occurring in Portions of Louisiana. https://t.co/VqHn0u1vgc

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