The ocean of dollar liquidity will continue to flood the markets for much longer. There Federal Reserve announced Thursday a changes to its monetary policy strategy, which now pursues an inflation target “around 2%”, which means that a temporary breach of the ceiling is possible to compensate for periods of too low inflation. In other words, the markets can rest easy: interest rates will remain low still for years.
“We intend to address a careful review of our monetary policy strategy, our communication tools and practices every five years – said the governor of the Federal Reserve, Jerome Powell, during his speech at the economic symposium of Jackson Hole – We also remain strongly focused on favoring the strongest possible labor market for the benefit of all Americans."
Powell explained that the change in strategy was unanimously adopted and that “decisions on the most appropriate monetary policy measures will continue to reflect a wide range of considerations and will not be dictated by any formula. Obviously, if excessive inflationary pressures were to build up or if inflation expectations rise beyond levels consistent with our target, then we would have no hesitation in taking action".
The news coming from the Central Bank came as no surprise Wall Street, which opened slightly higher: after the first few minutes of trading, the Dow Jones salt by 0,34% and theS & P 500 by 0,05%. The Nasdaq on the other hand, it lost 0,17%.
As for the real economy, the US Commerce Department also announced on Thursday that US GDP contracted by 31,7% in the second quarter, the worst since 1947, i.e. since this type of statistic existed. The interim revision of the data (the final one will arrive next month) corrected the result upwards compared to the preliminary estimate (-32,9%) and was better than the analysts' forecasts, which on average had estimated a drop of 32,4 %.
The slump in consumer spending (-34,1%, revised from -34,6%) and corporate profits (-11,7%, revised from -13,1%) weighed particularly heavily on the second-quarter slump. The PCE index, which measures the trend of inflation, marked a drop of 1,8% (revised from -1,9%), with the "core" figure, purged of the more volatile components, down by '1% (revised from -1,1%).
“In the second quarter we recorded the largest decline since the war – Powell said – but in May and June the recovery came earlier and stronger than expected. If we can get the pandemic under control, then the economy can recover quite quickly”. The number one of the Fed then underlined that some sectors of the economy – such as tourism and entertainment – have been severely affected and unfortunately the workers of these sectors have at least two difficult years ahead of them: it will therefore be a priority for the institutions to to help them during this time.
