Fed adopts average inflation target

Chair Jerome Powell announced this morning that the Fed will be adopting what he described as a “flexible form of average inflation targeting”, which we expect will trigger additional policy stimulus in the form of stronger forward guidance and possibly additional asset purchases too. But, with long-term interest rates already very low and the Fed still ruling out negative rates as undesirable, we don’t expect that additional stimulus to provide any significant boost to the real economy. That means the Fed might struggle to hit its 2% inflation rate at all, let alone deliver above-target inflation.