The Federal Reserve ushers in a long era of zero rates

It could hardly be stranger everything that surrounds the long-awaited Jackson Hole event in 2020: 100% telematic meetings followed through YouTube, a shortened agenda and a sea of ​​economic questions. But the great annual summit of central banks, in the mountains of Wyoming, never disappoints: no stiff speeches, but a powerful cannon from the head of the US Federal Reserve, Jerome Powell. Faced with the sluggishness of long-term growth and the realization that the correlation between low levels of unemployment and rising prices has been broken, the Fed chairman announced a relaxation of the inflation target that moves the foundations of a centenary central bank .

Expectations were high and Powell did not disappoint in the first virtual date since the first of these mythical economic days, almost four decades ago: inflation, he said, may remain above 2% (the explicit objective of the Fed) “for some weather". His words, from which a renewed emphasis on employment emerges - the second leg of the double mandate of the US central bank - give even more leeway to the US central bank and, above all, enshrine a long era of cheap money . Not so negative interest rates, a path that other countries have explored, but that the guardian of the monetary policy of the world's leading power has strictly ruled out on numerous occasions.

The minutes of the last meeting of the Fed's open market committee, published last week, were the perfect appetizer for the speech of the president of the most powerful issuing institute on the planet: the health crisis, it was read, continues to weigh heavily on economic activity , employment and inflation; the situation of companies, after the initial rebound due to misconfigurations, has stagnated; and the levels of uncertainty and risks, in sum, continue to be "extraordinarily high" and the "drag" on the economy, "heavy". A gloomy tone - realistic, at this point in the film - that did not sit well with the Bags. But this Thursday, the Fed chairman went one step further with an anything but vacuous speech: the economic crisis brought on by the virus is nothing more than the continuation of a period in which growth expectations have not stopped fall, a spiral in which demographic dynamics intermingle - fewer births and an increasingly aging population - and, what is more worrying, a slowdown in productivity about which conjectures proliferate but whose ultimate origin remains unknown to the minute .

“The economy is always evolving and our strategy to achieve goals must also adapt to tackle new challenges. 40 years ago, the main problem was high and growing inflation, which required a clear approach to restore the credibility [of the Fed] in its commitment to price stability ", recalled the head of the Federal Reserve, hinting that today it's not like that. This is a necessary prolegomenon for a historic turnaround with which the Federal Reserve has more room to deploy its monetary policy when the economy needs it most.

There are, broadly speaking, two points that, according to Powell himself, have led to this change in approach: long-term growth that has slowed down in recent decades and the realization that not even cheap money - interest rates Interest rates are low, which are here to stay for a long time - and a labor market that was going through its most buoyant phase in five decades before it was hit by the pandemic has pushed prices higher. "The historical strength of the labor market [in the US] has not triggered a significant increase in inflation: forecasts have routinely pointed to 2% but those projections have never materialized on a sustained basis."

The explicit long-term inflation target remains unchanged: it will remain at 2%. But the flexibility of the issuing institute when that limit is exceeded will be much greater. "If it falls below that when the economy falls and never rises above that figure even when the economy is strong, with the passage of time the average ends up being below 2%", the central banker has illustrated in an unusually didactic speech . Powell wanted to be well understood from beginning to end, but especially when he approached the keystone of the message: “To avoid this result and the associated adverse dynamics, (...) monetary policy will aim to achieve inflation moderately higher than 2% for some time ”. In silver: when the economy approaches that environment - and nothing seems to indicate that this will happen anytime soon - the Fed will tolerate “moderately higher” inflation for a time to ensure that the average gets as close to that figure as possible. “It is contradictory to many that we want to boost inflation, (…) but if it is persistently too low, it can pose significant risks to the economy,” Powell added. It is an implicit recognition of something that has been happening for a long time: the inflation mandate is not fulfilled because the objective is not reached, not because it is exceeded.

"It is historical in the sense that it is a change that happens once every many years", points out the economist Ángel Ubide. “This is the first time that the Fed has explicitly said that at certain times it will want inflation to be above 2%. That means that rates are not going to be raised just because unemployment is falling, but that they will only be raised when inflation has reached the target. The equilibrium interest rate has fallen and this has reduced the monetary policy space of central banks. With this change, the Federal Reserve gains space, ”he says by phone. "With this change, the Fed puts in writing what it has been doing for a long time and guarantee that zero [interest] rates will continue for a long, long time," adds a monetary policy expert from a multilateral body who prefers to remain anonymous. “It is a change from what was written, but not from how it has been operating for a long time. It is surprising, yes, that he closes the door to negative rates ”, he adds.

The Wyoming appointment is the closest thing to a starting signal for the most complex economic course in decades: 2019 was the year of sluggishness, 2020 the year of the crisis that ended all possible adjectives and 2021, except for new outbreaks, the of recovery. This, however, still sounds far away: half an hour before Powell began to speak, the unemployment data in the US made it clear that the virus is still raging and that the road until the job market recovers what it lost these months will be long. On this flank, the head of the Federal Reserve also took the opportunity to send a forceful promise: "the risks have grown" and the central bank will use "its full range of tools" of monetary policy to face them. "A strong labor market is a key national goal." The Federal Reserve today has an unobstructed path to achieve this.