The Federal Reserve’s New Strategy Comes With Major Risks
Too many questions about the central bank's intentions and policy framework have been left unanswered.
Federal Reserve Chair Jerome Powell is leading the central bank into new territory.
Photographer: Bloomberg
After a more than year-long review of its monetary policy strategy, the Federal Reserve has decided it will throw away the rule book and let inflation run higher and unemployment run lower before seeking to tighten financial conditions. To be clear, this change leaves the central bank pursuing an almost completely discretionary monetary policy, one where the risk is that the Fed fosters a more uncertain policy environment.
The Fed didn’t add any substance to their updated strategy – hopefully that will come later - leaving market participants somewhat adrift with respect to exactly what policy makers are trying to achieve. This lack of clarity may have been behind the rise in bond yields Thursday. It is reasonable to think yields will continue to drift higher until the Fed clarifies its intentions.