FEDERAL RESERVE:
Last week the Federal Open Market Committee (FOMC) discussed the first-ever public review of the Federal Reserve’s monetary policy framework. The Fed has been steadily increasing transparency of its monetary operations since Ben Bernanke became the Chair in 2006; Janet Yellen continued the policy of transparency while she served as Chair.
Last year the Federal Reserve began a series of Fed Listens events held around the country. These events were designed to gather feedback from citizens and business owners on how Fed Policy impacted their daily lives.
The result of the Fed Listens tour and several symposiums was a revision to the Statement on Longer-Run Goals and Monetary Policy Strategy, a document that lays out the Fed’s goals, articulates the framework for monetary policy, and serves as the foundation for policy actions.
There were two primary changes to the Statement.
First, Chair Powell said, “our revised statement says that our policy decision will be informed by our "assessments of the shortfalls of employment from its maximum level" rather than by "deviations from its maximum level" as in our previous statement. This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation”.
The Fed appears to be decoupling from the Phillips Curve, which states that inflation and unemployment have an inverse relationship. That is, low unemployment leads to increases in wage inflation. Going forward it appears that the Fed will allow the labor markets to run hot prior to taking any actions to cool the economy.
Second, Chair Powell said “our longer-run goal continues to be an inflation rate of 2 percent. However, if inflation runs below 2 percent following economic downturns but never moves above 2 percent even when the economy is strong, then, over time, inflation will average less than 2 percent. Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down. To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time”.
Going forward it appears that the Fed will allow inflation to run a little hot prior to taking any actions to cool the economy. Both of these changes are dovish and indicate that the Fed will keep interest rates lower for a longer period of time. Quantitative Easing policies will also remain in place for the near future.
I interpret the above as being relatively supportive to the financial markets.
PODCAST:
The End Game Episode 6 with Lacy Hunt: I have featured this podcast in the past, but I think it is worth featuring it again. This is the first time I have featured the same podcast twice, but it is timely given everything going on with Fed and interest rates. This is a great discussion on how the treasury market and interest rates work.
The Pomp Podcast Episode 367 with John St. Capital (pseudonym): This is a great podcast covering asset allocation, structural shifts in 60/40 portfolios, interest rates, public vs private companies, SPACs, metrics on various public equity verticals and Bitcoin.
I hope you enjoyed the letter and as always feel free to share it with friends and colleagues. If you are interested in startups you can join over 750 other backers that follow my syndicate here.
Have a great Labor Day weekend! Sean Bill / MacroCrunch