Why The Federal Reserve's New Approach To Inflation Makes Sense

Last week, Federal Reserve Chairman Jerome Powell said the Fed will be making a subtle shift in the approach to its 2% inflation target.

On Monday, Mizuho chief economist Steve Ricchiuto said the shift in Fed mindset may be more important than investors realize in the long-term — and it should be good news for the SPDR S&P 500 ETF Trust SPY.

Ricchiuto said his initial reaction to Powell’s comments was that it has taken the Fed a long time to recognize an important shift in the U.S. economy.

“Makers of monetary policy had finally recognized the fundamental shift in the economy from excess demand to excess supply that had been slowly taking place since Ronald Reagan introduced his supply-side tax cuts back in August 1981,” the economist said Monday.

Excess Supply Vs. Excess Demand: Since the 1980s, Ricchiuto said the Fed has been operating under the assumption that the biggest risk to the U.S. economy is hyperinflation driven by undersupply.

“In a world of excess demand, the Fed’s responsibility is to take away the punch bowl before the party gets started. In a world of excess supply, the Fed’s responsibility is to take away the punch bowl only after the party gets a good buzz going — and then their greater responsibility is to take the car keys away from the guests who should not be driving home,” he wrote.

As a result of this shift, Ricchiuto said tighter labor markets, higher inflation levels and a lower dollar could become the new normal in coming years. Those economic conditions are good news for stock prices and credit spread, he said.

Benzinga’s Take: Many critics of the Federal Reserve’s aggressive COVID-19 stimulus spending in 2020 may be concerned about inflation. But the reality is that since the financial crisis in 2008, inflation levels have spent the majority of the time well below the Fed’s 2% target.

Related Links:

Pending Home Sales Up 5.9% In July, Ahead Of Expectations

Investors Cheer Powell's New 'Average Inflation Targeting' Policy

Posted In: InflationmizuhoSteve RicchiutoAnalyst ColorEconomicsFederal ReserveAnalyst Ratings

Ad Disclosure: The rate information is obtained by Bankrate from the listed institutions. Bankrate cannot guaranty the accuracy or availability of any rates shown above. Institutions may have different rates on their own websites than those posted on Bankrate.com. The listings that appear on this page are from companies from which this website receives compensation, which may impact how, where, and in what order products appear. This table does not include all companies or all available products.

All rates are subject to change without notice and may vary depending on location. These quotes are from banks, thrifts, and credit unions, some of whom have paid for a link to their own Web site where you can find additional information. Those with a paid link are our Advertisers. Those without a paid link are listings we obtain to improve the consumer shopping experience and are not Advertisers. To receive the Bankrate.com rate from an Advertiser, please identify yourself as a Bankrate customer. Bank and thrift deposits are insured by the Federal Deposit Insurance Corp. Credit union deposits are insured by the National Credit Union Administration.

Consumer Satisfaction: Bankrate attempts to verify the accuracy and availability of its Advertisers' terms through its quality assurance process and requires Advertisers to agree to our Terms and Conditions and to adhere to our Quality Control Program. If you believe that you have received an inaccurate quote or are otherwise not satisfied with the services provided to you by the institution you choose, please click here.

Rate collection and criteria: Click here for more information on rate collection and criteria.