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Fed Expected to Make Major Commitment to Ramping Up Inflation in the Near Future

The Federal Reserve Bank is expected to solidify a policy outline in the new few months that would commit it to low rates for years as it plans to pursue an agenda for higher inflation, a report from CNBC.com said.

One major change would be a harder commitment to pushing inflation higher, through a proposed pledge to not raise rates until it hits at least 2%.

With gold prices rising, the dollar falling and a rush to inflation-indexed bonds, markets have been betting on such a change, the report stated.In order to achieve such a goal, the bank would pledge to not raise interest rates until both inflation and unemployment targets are hit.

Inflation is currently closer to 1% and the jobless rate remains higher than it was during the Great Depression, so such a target could take years to hit, the report stated.

The new policy initiatives could be announced as soon as September.

Fed Chairman Jerome Powell said last week that a yearlong examination of policy communication and implementation could be wrapped up “in the near future.”

Public meetings and detailed discussions among central bank officials are expected to occur before any decisions are made.

More “Moderate Approach” Expected Compared to Great Recession

Also according to the CNBC article, the Fed is expected to take an even more accommodative approach than it did during the Great Recession.

“We remain firmly of the view that this is a deeply consequential shift, even if it is one that has been seeping into Fed decision-making for some time, that will shape a different Fed reaction function in this cycle than in the last,” said head of global policy and central bank strategy Krishna Guha, of Evercore ISI. 

The Fed is expected to be slower to tighten policy when it sees inflation rising, however.

In 2018, Powell and his colleagues were roundly criticized for enacting rate increases that eventually had to be rolled back. The Fed’s benchmark overnight lending rate is targeted to near zero, where it moved during the beginning of the pandemic according to CNBC.

“We believe that the Fed publicly would welcome inflation in a range of 2% up to 4% as a long overdue offset to inflation running below 2% for so long in the past,” added Ed Yardeni, head of Yardeni Research. 

While the U.S. money supply is typically known for its slow, steady growth, it has already grown by 20% from $15.33 trillion at the end of 2019 to $18.3 trillion at the end of July, a Wednesday report noted.

Inflation Could Be a New Fact of Life in the Coming Years

An era of tepid price rsies may be coming to an end, investors from Ray Dalio to Paul Tudor Jones have warned according to CNBC.

“It’s fair to say we have never observed money supply growth as high as it is today,” Morgan Stanley chief U.S. equity strategist Mike Wilson said earlier this week.

The “Fed may not be in control of Money Supply growth which means they won’t have control of inflation either, if it gets going,” he added.

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