The average inflation targeting recently adopted by the US Federal Reserve is expected to play an essential role in today’s Federal Open Market Committee meeting and policy announcement.
The Fed would provide its updated Summary of Economic Projections, and the chances are it would reveal expectations of lower interest rates in the days ahead. But, traders don’t expect any additional stimulus measures to be announced today apart from dovish forward guidance.
Average inflation targeting allows the Fed to stretch its monetary policy further than the earlier phase, by allowing inflation to stay above the target rate for a time-period comparable to one in which it stayed below par.
Such an approach warrants keeping a low-interest rate for a much longer time than earlier anticipated. The earlier Fed policies haven’t met much success in increasing the inflation rate to a target of two Percent, and the five-year inflation expectations are now near 1.54 Percent.
Equity markets were gaining during the Asia-Pacific trading led by Australia’s ASX 200 index posting a 1.04 Percent surge supported by the most massive MoM rise in the Westpac Leading Economic Index since September 1997.
The haven-linked Japanese Yen and the US dollar couldn’t hold against their competitors while the pro-risk Australian dollar was steady above 0.73 levels. Gold and silver were up, while 10-year US Treasury yield fell.
US fiscal stimulus discussions are still in an impasse and coronavirus deaths have crossed 200,000.
The shift in inflation approach will keep interest rates lower for longer and June meeting details revealed policymakers were expecting the Fed Funds rate would normalize at 2.5 Percent post-2022.
Markets expect clarifications from the Fed today regarding the updated framework would support risk assets while dragging the US dollar down against other major currencies.