During the Jackson Hole Symposium yesterday, Federal Reserve Chairman Jerome Powell announced the adoption of Average inflation Targeting (AIT), a monetary policy tool that will stimulate the rise of inflation level above the Fed’s 2% target, something that the central bank has failed to do so for many years over the past decade. Traditionally, the Fed aims to achieve their 2% inflation target on a yearly basis. But with the adoption of AIT, the Fed will now aim to achieve that target over a period of time, making it easier for the target to be hit.

The adoption of AIT also implies that when unemployment rate falls, the Fed is less likely to raise interest rates so long as inflation level does not surpass the central bank’s acceptable range. Under this new approach to inflation, a decline in unemployment rate is less likely to cause a jump in inflation due to its “averaging effect” whereby inflation levels will be smoothened out across a period of time (a similar effect as the moving average). Thus, the Fed will be able to keep interest rate low for a longer period.

close

Get notified when there is a new post. Read new post to earn 10 points!

1 Star2 Stars3 Stars4 Stars5 Stars (2 votes, average: 4.50 out of 5)
Loading...

By Gim Hong Lee

Gim Hong has been a full-time currency trader for more than 2.5 years, focusing on day and swing trading of major currencies and their crosses. He is a frequent contributor of currency and economic analysis in Forex Trading Asia. Graduated from Columbia University in the City of New York with a bachelor’s degree in applied mathematics and statistics, the nerdy side of Gim Hong enjoys learning about data analysis, machine learning and their applications in currency trading.

Leave a Reply

Your email address will not be published. Required fields are marked *