UNITED STATES ECONOMIC OUTLOOK
At its annual Jackson Hole Symposium on 27 August, the Fed outlined its strategic review of its monetary policy strategy going forward amid the elevated unemployment rate and relatively soft inflationary pressures. The Fed indicated a shift in its policy objectives with the introduction of a flexible form of average inflation targeting, which will allow inflation to run temporarily above its previous 2.0% objective following periods of running below 2.0%. This shift in stance allows the Fed to refrain from raising interest rates once inflation runs above 2.0%, helping it to further support the economic recovery. The Fed also changed its stance on its full-employment mandate, which means the Bank will now refrain from tightening its stance simply because unemployment is close to or below previous historical lows.
In the near to medium term the change will have little impact, as soft price pressures and weak economic activity meant monetary policy was always going to remain accommodative for some time. However, looking to the longer term, the policy shift should see interest rates stay lower for longer, as well as bring about slightly higher inflation.
Our panel of leading economic forecasters unanimously see the Federal Funds Target Rate range at 0.00–0.25% until 2022, with rates seen below their pre-Covid level throughout our forecast horizon to 2024, as the Bank looks to nurture the economy back to health. Inflation is expected to move back close to the 2.0% target by the middle of next year.