MarketWatch: The Fed’s new policy may have just ushered in a new era of uncertainty on Wall Street

Author: , Post Date: August 29, 2020

Aug. 29, 2020
By Mark DeCambre

Excerpt below.

Cumberland Advisors' Robert "Bob" Eisenbeis, Ph.D.

Market volatility may increase without more guidance on how the Fed’s policy will be implemented.

As the Fed has put it, “if inflation expectations fall, interest rates would decline too.”

And receding interest rates make it difficult for the Fed to use its main tool for managing monetary policy: the federal funds rate. The Fed lowers its benchmark interest rate to stimulate economic activity and raises it to slow it.

A lack of clarity on the specifics around its altered policy could inject more uncertainty into the market over the longer term, experts said.

“When it comes to the shift in how the Committee views its inflation objective, much was left unsaid, and careful consideration suggests that the new approach may actually complicate the policy process in terms of both implementation and communication,” Robert Eisenbeis, chief monetary economist at Cumberland Advisors, in a Friday note.

Eisenbeis says that the Fed didn’t immediately specify which inflation measure it would use. Traditionally, the central bank’s preferred inflation gauge, is the PCE price index, or personal-consumption expenditures price index, but the commonly referenced gauge on Wall Street is the CPI, or consumer-price index.

“Finally, the elephant in the room is the fact that the [Fed] has pursued a 2% inflation target since January 25, 2012, but has continually undershot that level,” The Cumberland analysts wrote.

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