At the Jackson Hole meeting, Jerome Powell, the president of the central bank estimated that it was targeting inflation of 2% on average in the long road to full employment. But it will be able to tolerate occasional surges above this objective, which thus loses its “sacred” and restrictive character. It was Ben Bernanke who set this level of 2% in 2012. Before, the Fed was more flexible. In July, consumer prices had increased by just 1% over the past 12 months.
“The emphasis on supporting jobs and skepticism about accelerating inflation signal to markets that the Federal Reserve will aggressively stimulate the economy. This new framework of monetary policy favors a weakening of the dollar for a long period ”, comments Steve Englander, Head of G10 Currency Strategy at Standard Chartered. Since the speech, the greenback has given up 0.7%, and the euro has returned above $ 1.19 to 1.1910.
Follow in the footsteps of the Fed
“We do not believe in a prolonged decline in the dollar. Other central banks should follow in the footsteps of the Fed and follow its example on inflation which will lower their currencies ” says Viraj Patel, strategist at Arkera. . In Europe, euro area GDP is unlikely to return to its 2019 level until 2023 and in some countries later. Tolerating inflation to exceed the 2% target is a good thing after a major economic crisis ”.
“Ideal” rate curve
The greater tolerance for inflation drove the US 10-year bond rate back up to 0.74% from 0.53% at the start of the month. The Federal Reserve is monitoring the yield curve closely to avoid very damaging tensions in the bond market that would complicate the recovery of the economy. Jerome Powell did not mention in his Jackson Hole speech a weapon of massive deterrence in the face of market speculation. The Fed would decide that 2, 5, and 10-year yields should not exceed certain thresholds. She would buy the various bonds to lower their yields and create a slope in rates “Ideal”. In a quantitative easing plan, the Fed announces in advance that it will buy a certain amount of bonds. This time, she would not give any amounts and information to the markets. It would imply that it would intervene whatever the cost to limit the rise in long rates.
monetary bazooka
This new monetary policy tool, implemented in Japan for several years, “Was favored by some members of the Fed and former presidents like Ben Bernanke and Janet Yellen, even before the coronavirus crisis, notes David Wessel of the Brookings Institution. The Fed had put it in place during World War II so that long rate yields would not exceed 2.5%. This tool was adopted last March by the Australian central bank, which aims, for example, to set the Australian 3-year rate at 0.25%. “
This new milestone in monetary interventionism has not yet been taken. It would be very negative for the evolution of the dollar. At its lowest since May 2018, the greenback has lost nearly 2% since the start of the year and 5% against the euro. The forecast consensus established by the Bloomberg agency anticipates that the dollar will rise globally by nearly 2% by the end of the year.
Falling dollar favors global trade
The dollar’s declining phases coincided with stronger global growth, particularly in emerging countries. More than half of world trade not involving the United States is denominated in dollars. In some countries (Brazil, Indonesia, India, Colombia, South Korea, Malaysia, Canada, etc.) more than two thirds of their trade (imports and exports) is carried out in dollars. The fall in the greenback lowers the cost of imports from many countries. According to Goldman Sachs, a 10% drop in the dollar (like the one that has occurred since March) pushes world trade outside the United States up 5%.
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