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Fed to Unveil New Inflation Policy, Washington Inaction Creating “Multiple Cliff” Deadline

Look for a preview of a major shift in Fed policy regarding inflation at tomorrow’s virtual Jackson Hole symposium. Fed Chair Powell is expected to unveil a policy of an “average inflation” target. Instead of using a 2% inflation figure as a “trigger” to increase rates, the new policy will allow inflation to hover above and below 2%. This means that the Fed is  pushing out the eventual rate increase even farther. The reasoning is to avoid a “trap” of sluggish growth along with producers unable to raise prices effectively. This will allow inflation to “run” a little while, and is another recognition that the old rules don’t apply in the “new normal” of ultra low rates and low growth/inflation. Meanwhile, on the fiscal policy front, nothing is happening with stimulus negotiations between the House, Senate and Administration. The major airlines are announcing massive layoffs for October 1, when their stimulus ends (unless the stimulus is extended). Airlines are a critical part of the USA’s economic infrastructure. With a full government shutdown looming in 35 days (October 1), this creates the “final” deadline for Congress to come to some sort of agreement in a hyper partisan environment close to the election. Critical unemployment benefits, SBA funds for small businesses still suffering from pandemic issues, school aid, and funds for treatment/vaccines are all on hold until then. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners