Ma­jor Fed pol­icy shift as Pow­ell pledges to over­look ris­ing in­fla­tion

The Daily Telegraph - Business - - Front Page - By

Rus­sell Lynch

FED­ERAL Re­serve chair­man Jerome Pow­ell has un­veiled the big­gest pol­icy over­haul for nearly a decade at the US cen­tral bank, as he un­leashes yet more fire­power to fight off the coro­n­avirus cri­sis.

The Fed will seek to stoke up eco­nomic growth even if this means price rises spike higher than its in­fla­tion tar­get, in a ma­jor break with pre­vi­ous guid­ance.

Pol­i­cy­mak­ers have com­mit­ted to achiev­ing 2pc in­fla­tion since 2012, but will now tol­er­ate over­shoots af­ter switch­ing to an “av­er­age” tar­get – al­low­ing the econ­omy to run faster and help­ing to prop up mil­lions of jobs.

The move is the clear­est sig­nal yet to fi­nan­cial mar­kets that in­ter­est rates will be stuck near zero for years to come, fur­ther fu­elling a share boom that pushed the S&P 500 to new highs in the wake of the chair­man’s speech. It could spark calls for the Bank of Eng­land to fol­low suit.

The Fed has al­ready cut in­ter­est rates close to zero and em­barked on a $2tril­lion (£1.5tril­lion) money print­ing pro­gramme to counter the eco­nomic plunge trig­gered by Covid-19. But Mr

Pow­ell’s on­line com­ments at the Jack­son Hole sym­po­sium that “ap­pro­pri­ate mon­e­tary pol­icy will likely aim to achieve in­fla­tion mod­er­ately above 2pc for some time” were seized on by in­vestors.

James Knight­ley, ING’s US econ­o­mist, said: “The Fed’s new lan­guage gives them the flex­i­bil­ity to let the econ­omy run a lit­tle hot­ter be­fore con­tem­plat­ing rais­ing in­ter­est rates.”

The cen­tral bank also bol­stered ef­forts to sup­port the US jobs re­cov­ery, with un­em­ploy­ment still at 10.2pc fol­low­ing the virus.

Mr Pow­ell said that the Fed “would be highly fo­cused on fos­ter­ing as strong a labour mar­ket as pos­si­ble for the ben­e­fit of all Amer­i­cans”.

Un­der its pre­vi­ous man­date, the Fed would raise rates if the job mar­ket showed signs of over­heat­ing and pay rises started to snow­ball. But Mr Pow­ell

has shifted to a more re­laxed stance af­ter record low un­em­ploy­ment failed to trig­ger in­fla­tion, while the cen­tral bank also ac­knowl­edged the ben­e­fits of a strong labour mar­ket for low-in­come com­mu­ni­ties.

Kathy Bost­jan­cic, of Ox­ford Eco­nomics, said: “Pol­i­cy­mak­ers will be more wor­ried about el­e­vated un­em­ploy­ment rates than low un­em­ploy­ment rates that pre­vi­ously stoked con­cern about a pick-up in in­fla­tion.”

The ex­tent of the jobs cri­sis fac­ing the US was un­der­lined by fig­ures show­ing a fur­ther mil­lion work­ers ap­plied for un­em­ploy­ment ben­e­fits last week.

More than 27m Amer­i­cans – nearly a tenth of the pop­u­la­tion – are claim­ing some form of ben­e­fit as the jobs re­cov­ery threat­ens to lose steam. The econ­omy shrank by 9.1pc in the sec­ond quar­ter.

Mr Pow­ell said the Fed is still com­mit­ted to the 2pc goal “over time”. The Fed’s re­view, de­layed by the pan­demic, could en­cour­age other cen­tral banks to bol­ster their own pol­icy arse­nal.

The Bank of Eng­land, whose Gov­er­nor An­drew Bai­ley is set to speak at the on­line sym­po­sium to­day, is as­sess­ing the po­ten­tial of tools such as neg­a­tive in­ter­est rates.

Jerome Pow­ell, the Fed chair­man, has sig­nalled he is pre­pared to let the econ­omy run hot­ter to stoke growth

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