Far From Normal, Fed Makes Pre-Labor Day Announcement

August is typically a quiet month for financial markets, as participants sneak in one last summer vacation before school starts back. Trading volumes are typically lighter, and any major monetary policy announcements would normally wait until at least after Labor Day. However, if we’ve learned anything this year, it’s that 2020 is about as far from normal as it gets. Rather than wait until the September FOMC meeting, Fed Chair Jerome Powell unveiled a new monetary policy framework for the central bank during his August 27 speech in Jackson Hole, WY, which further expands the current dovish policies. The Fed has been engaged in a review of its policy framework since November 2018, and a major consideration has been a shift to an average inflation targeting approach. In line with our expectations, Powell announced just that, and the Fed simultaneously released a new Statement on Longer-Run Goals and Monetary Policy Strategy.

August At-A-Glance

• August was atypically busy for broad financial markets.
• Fed Chair Jerome Powell unveiled a new monetary policy framework during his annual Jackson Hole address, including a shift to average inflation targeting.
• Despite various distractions in recent weeks, COVID-19 remains the predominant driver of the current economic outlook.

Before detailing this new approach, it would perhaps be helpful to provide some additional context and perspective. There have been multiple economic developments culminating for more than a decade driving this policy shift, including the longer-term trend in GDP growth and productivity for the United States and the rest of the major developed economies. This is due in part to demographic factors, including declining birth rates and aging populations. The neutral (or natural) rate of interest, or R-star, which is the theoretical fed funds rate that is neither accommodative nor restrictive, has been falling for much of the last two decades, which coincides with the longer-term decline in the trend GDP growth rate.

Read more about the latest economic data and overall market trends here.

This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.