“Despite a more upbeat outlook and introducing a more dovish policy framework the US Federal Reserve took no action at its latest policy meeting. Opinion Keith Wade, Chief Economist & Strategist, Schroders.
“Interest rates and the pace of asset purchases remain unchanged although the central bank did spell out its new average inflation target by saying they “will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent”.
“The clearest steer on how its new policy would work in practice was contained in their Economic Projections. New forecasts show inflation moving back up to 2% in 2023 alongside no change in projected interest rates and marks a departure from the past when the Fed would have signalled a tightening of policy in response to such an outlook.
“Under the previous regime, inflation moving up to 2% alongside robust growth would be met by a pre-emptive tightening to cool the economy and keep inflation stable. The need to act ahead of a potential inflation overshoot above 2% reflected the lags between policy action and its impact on the real economy. The new policy means that the Fed is going to be more patient and is willing to wait until inflation has gone above 2% before it responds.
“The statement is no real surprise, but may disappoint those who were looking for more explicit guidance on how policy would respond to changing economic conditions. Nonetheless, it is in line with past meetings just ahead of a presidential election where the approach has been to avoid saying or doing anything controversial.”