Jerome Powell throws the US dollar under a bus in Jackson Hole
The annual Economic Policy Symposium organized by the Federal Reserve Bank of Kansas City – an event attended by finance ministers, central bank managers and academics, among others – was held virtually because of COVID-19’s concerns this year, and there was little virtual about the announcement. The US dollar would be given to the wolves.
A monumental change from an already unprecedented monetary policy stance
Undoubtedly, the Federal Reserve has persisted in an accommodating Bitcoin Future monetary policy stance since the Great Recession, despite strong years of growth in the midst of the Obama years and slow but steady positive growth the rest of the time.
Before the coronavirus pandemic, the Federal Reserve had begun to raise interest rates beyond the zero range, as it recognized the need to leave something in the tank in case another crisis occurred. These actions coincided roughly with growing concern among central banks around the world that accommodative monetary policy had failed to generate robust growth rates and risked leaving central banks toothless in the event of a severe recession.
What has been little understood over the past two decades is that, with Chinese imports proliferating in Western markets, deflationary forces were being bought up abroad at the same time that demand for labor was facing unprecedented challenges.
The global economic structure was changing.
Yet central banks around the world persisted in their efforts to inflate economies and foster growth, not that there was no growth. In fact, when Powell took the reins in 2018, the United States was enjoying the longest period of economic expansion in its history. But growth was slow.
The speed of Bitcoin and USD collapsed, but the price of BTC reacted differently
Changing course at the wrong time
The Federal Reserve had increased rates nine times between 2015 and 2018, and prices stagnated each time it did so. That change of direction, however, was soon to be turned upside down courtesy of a unique pandemic in 100 years.
Since the onslaught of COVID-19, the Federal Reserve and its counterpart banks drastically reduced rates to zero as economies stalled. In March, the Federal Reserve announced a policy of being prepared to buy an unlimited amount of Treasury bonds and mortgage-backed securities to shore up financial markets.
Its balance sheet shot up by more than $3 trillion to about $7 trillion with no end in sight. And last week, Powell revealed a long-awaited „average inflation targeting“ stance. Since 1977, the Federal Reserve’s dual mandate has been to maintain maximum employment and price stability. The latter is considered an inflation rate of 2%.
All that changed last Thursday. In targeting average inflation, Powell indicated that the Fed would keep interest rates lower than necessary, despite the health of the economy to push prevailing inflation above 2% if inflation remains below that for too long.
In the current context, the outlook is frightening. Inflation has been well below 2% since the Great Recession. To drag that average down to the target rate retrospectively, Powell and his colleagues can target levels of around 3% for an extended period of time.