Fed can’t talk the U.S. economy into inflation

Bloomberg Opinion/Brian Chapatta

cartoon image of man flipping a gold coin“Perhaps the confusion stemmed from Powell swinging back and forth on inflation himself. On the one hand, he emphasized that the central bank would no longer be dictated by a formula that balances employment and price growth, which, as my Bloomberg Opinion colleague Tim Duy eloquently put it, ‘throws the Taylor Rule* into the dumpster.’ That gives policymakers more discretion than before, which could make it more difficult for them to press pause on a hot economy. And yet Powell made clear that any inflation overshoots would only be ‘moderate,’ suggesting there’s some tangible level not too far above 2% that would make the Fed nervous.”

USAGOLD note:  What the Fed chairman described yesterday reeks of a “Fed at the end of its rope,” as Chappatta puts it.  So where does all of this put us? The bond market, as this article points out, didn’t know how to react to Powell’s speech yesterday. Neither did gold.  At first it shot up. Then it dropped about $50.  By the end of the day, it was down $20 and looking to claw its way back up.  The other markets seemed equally confused over the whole matter.

*The Taylor Rule,” according to Investopedia, “suggests that the Federal Reserve should raise rates when inflation is above target or when gross domestic product (GDP) growth is too high and above potential. It also suggests that the Fed should lower rates when inflation is below the target level or when GDP growth is too slow and below potential.”

Repost from 8-27-2020

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