New economic challenges and the Fed’s monetary policy review

Text of speech delivered by Fed chairman Jerome Powell 8-27-2020

photo of Fed chairman Powell 8/27/20 speech“In seeking to achieve inflation that averages 2 percent over time, we are not tying ourselves to a particular mathematical formula that defines the average. Thus, our approach could be viewed as a flexible form of average inflation targeting. Our decisions about appropriate monetary policy will continue to reflect a broad array of considerations and will not be dictated by any formula. Of course, if excessive inflationary pressures were to build or inflation expectations were to ratchet above levels consistent with our goal, we would not hesitate to act … In conducting monetary policy, we will remain highly focused on fostering as strong a labor market as possible for the benefit of all Americans. And we will steadfastly seek to achieve a 2 percent inflation rate over time.”

USAGOLD note 1:  It appears to us that this is the section of the speech (above) to which the gold market reacted this morning with its swift and sharp decline – now down almost $35 at $1922.50 (after trading as high as $1970 earlier this morning). The fact that the Fed will not “hesitate to act” if inflation expectations were to rise; and, that it will “steadfastly” deploy policy to keep the average inflation rate at 2% over time will be read in some circles as the equivalent of keeping the door both halfway open and halfway closed on future stimulus policies.

USAGOLD note 2: That and the lack of any announcement on specific policy changes might inspire a good many to shrug their shoulders and think this isn’t really much of a change after all. Hence, gold’s sell-off …… At least that’s our initial interpretation. The tepid reactions in other financial markets – stocks, bonds and the dollar – lends support to that thesis.

USAGOLD note 3: The market reaction is likely to take some twists and turns going forward as the policy review’s ramifications and/or shortcomings sink in. Too, we could see this speech pushed quickly to the background and previous, more immediate market concerns reestablish themselves.

Stay tuned.  We will keep you posted.

Notes from Thursday afternoon 8/27/2020

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