The Fed’s new policy framework

Analyst Insights, Monday, 7th of September, 2020

The key takeaway from Fed chairman Powell’s speech at the annual Jackson Hole, Wyoming, conference, was that the Fed will not be crashing the economy in the future.

In the past, and the name of low inflation, the Fed (and most central banks) have been crashing economies by raising rates to cool down the economy. And after the crash, they then lowered rates and initiated accommodation measures to reinflate the economy all over again. I never understood this logic, and was always a proponent of higher inflation tolerance, and lower rates even in the face of inflation.

While currently there is no inflation to be seen, and chances are inflation will take a long time to average above 2%, nevertheless this new policy framework should be good for equities.

And while equities today are probably ahead of themselves from a multiple perspective, the fact that the central bank won’t cause technical recessions in the name of lower inflation, will probably keep multiples buoyant.

Yes, this is a reversal from Paul Volcker’s strategy of the 1980s, but today inflation has been tamed and this new framework is probably overdue.

The bottom line is that we are entering a new era insofar as central bank policy. While it’s too early to tell how this new policy will work, I guess that long term, it should benefit equities.