Fed's New Approach in Policy Strategy Will Affect Interest Rates

Fed's New Approach in Policy Strategy Will Affect Interest Rates

The US Federal Reserve (Fed) changed its monetary policy strategy. According to analysts who made evaluations after this development, the Fed's new approach in policy strategy will affect interest rates. US Federal Reserve (Fed) Chairman Jerome Powell said in a speech yesterday at the Jackson Hole Economic Policy Symposium that the bank has adopted a new approach in its monetary policy strategy. Following Powell's statements, analysts commented that with the "average inflation targeting" approach adopted by the bank, expectations will increase further and interest rates will remain at lower levels for a long time. Powell stated that they determined the employment market as the focal point in their new monetary policy strategy where employment is placed in front of inflation. Fed Chairman stated that the highest employment is a "broad-based and inclusive target". Stating that a significant change has been made regarding price stability with the new approach, Jerome Powell announced that they will set the “average” 2 percent inflation as a target.

Dovish Approach

After Powell's statements, analysts made evaluations on the subject and commented that the US Federal Reserve's adoption of the "average inflation targeting" approach was a step expected by the markets and this decision would further increase inflation expectations. In addition, analysts stated that the average inflation targeted by the Fed is a "dovish" approach, and that the Fed will keep interest rates at lower levels for a long time with the change in monetary policy. Stating that the decreases in unemployment rates in the previous periods caused high inflation concerns, analysts reminded that this situation pushed the Fed to increase the interest rates and noted that the new inflation policy of the bank prepared the ground for a deeper change. In his speech at the Jackson Hole Economic Policy Symposium yesterday, Fed Chairman Powell reiterated that the Fed will use all its tools to support the US economy, which was hit hard by the coronavirus epidemic. analysts stated that monetary growth will continue at a high rate to support the economy and in this process, inflation will be tolerated above the targeted level.

"It Will Keep Interest Rates At The Lowest Level"

Interviewing with AA correspondent, Moody's Analytics Director Ryan Sweet said that markets expect the Fed to adopt "average inflation targeting". Pointing out that the US Federal Reserve has made communication easier by adopting this new approach, Sweet said, "If the FED predicts that inflation will remain below the target for a while, it may aim for an inflation above the target. Thus, it can achieve the average inflation target during the period." . However, making evaluations on the issue, Sweet said, "The Fed's adoption of the average inflation targeting will increase inflation expectations.". Underlining that the Fed's employment policy with average inflation targeting is a dovish approach, Sweet said, "The Fed is committed to keeping interest rates as low as necessary." .