US - Fed meeting preview
The Federal Reserve is scheduled to meet on 15-16 September (decision and press conference on 16 September).
At August’s Jackson Hole conference, Fed chairman Jerome Powell announced a new monetary policy strategy: flexible average inflation targeting (FAIT).
But Powell remained vague about what this meant in practice, and whether more accommodation would come, giving the impression that this ‘new’ strategy was more about marketing than a real revolution. This week’s meeting may be a further source of frustration.
We do not expect the guidance on rates to be explicitly linked to the inflation outcome as we think the most important word in FAIT is actually ‘flexible’. The Fed, which has a habit of moving the goal posts to keep rates low, wants to keep latitude in its decision making and stay away from hard-set formula.
We continue to believe the Fed will augment its asset purchases (now USD 120bn per month) in the fourth quarter, given signs the recovery might be flatlining, but we do not think the Fed is ready to pre-announce that just yet.
The Fed could voice its anxiety about the stranded fiscal package in Washington DC, given the risks to the economy’s growth trajectory.
FAIT is actually the tree that hides a bigger forest: the Fed is being trapped into perpetual accommodation, in our view, by the high private and public debt pile in the economy (cf. our ‘debt dominance’ thesis). We continue to expect rates to stay on the floor for several years as we doubt the Fed’s new strategy will by itself move the needle on inflation.