Market Overview

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

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

Markets ticked higher on Thursday after Federal Reserve Chair Jerome Powell gave a speech at the Jackson Hole annual economic symposium outlining the Fed’s new approach to inflation.

What Happened? Powell discussed the Fed’s new “average inflation targeting” policy in which it may keep interest rates near 0% until inflation levels exceed its 2% inflation target.

Powell said the Fed also intends to begin focusing its employment efforts more on the lower end of the U.S. income range.

Why It’s Important: Moving forward, the Fed intends to be less aggressive in raising interest rates in response to falling unemployment and will instead focus more on inflation levels, according to Powell.

“Many find it counterintuitive that the Fed would want to push up inflation,” Powell said. “However, inflation that is persistently too low can pose serious risks to the economy.”

He also said the interest rate level required to keep economic growth in balance has decreased considerably throughout the years due to changes in demographics, technology, and other factors.

“Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations,” Powell said.

Since the financial crisis in 2008, the Federal Reserve has had a difficult time reaching and maintaining its 2% target inflation rate. Powell said Thursday that the change in philosophy “may appear subtle,” but it ' based on the belief that the economy can maintain “a robust job market” without triggering hyperinflation.

“Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time,” Powell said.

Benzinga’s Take: Investors will now try to anticipate the long-term fallout from unprecedented fiscal stimulus measures and a Fed that appears committed to maintaining historically low interest rates until inflation levels exceed 2%.

The positive initial market reaction was expected given companies will continue to have access to cheap capital and investors will continue to have few viable options for fixed income.

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