There are all sorts of rationales why the Fed chief changed his stance on inflation. Why he did matters to investors, writes jmackin2
beyond narrow categories such as energy and used cars. It is real, after-inflation, interest rates that matter to the economy, and higher inflation with unchanged policy means lower real borrowing rates. The higher inflation gets without the Fed acting, the more stimulus monetary policy is providing.
With full employment almost achieved, it makes sense to refocus on inflation, and rates should start a steady rise. The futures market is priced for this approach: the most probable outcome is three 0.25 percentage point rate rises next year, according to CME Group calculations, with a one-in-four chance of reaching 1.25% or higher..
If the workforce is permanently smaller as a result of the pandemic, that is a nasty hit to supply that should change how the Fed reacts. The economy will generate more inflation for any given level of demand, so rates will need to be higher than they otherwise would be with the same level of economic growth, forever.
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