Sep 24, 2020 - Economy & Business

Investors aren't convinced the Fed can raise inflation

Data: St. Louis Fed; Chart: Axios Visuals
Data: St. Louis Fed; Chart: Axios Visuals

Members of the Fed, including chair Jerome Powell, have spent nearly a month talking about the central bank's shift to average inflation targeting in an effort to boost U.S. inflation and it has fallen on deaf ears.

Driving the news: A survey from the Cleveland Fed found that "despite extensive coverage in the news media, Powell’s speech apparently did not reach or register with the vast majority of the population."

  • Even for those who were aware, "the news had little impact."

Why it matters: Inflation expectations are a core tenet of inflation and the Fed has failed to move the needle on the public's outlook.

  • "[B]oth before and after the announcement, respondents’ two most commonly perceived objectives of the Federal Reserve were maintaining a strong dollar and keeping interest rates low to reduce the government’s cost of borrowing," the Cleveland Fed notes.
  • Perhaps more importantly, "investors are not convinced the Fed will succeed," Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA, says in a note to clients.

Be smart: "Investors are assuming that the risk of deflation is rising as the Fed’s ability to ensure a sustained recovery on its own is limited," Ricchiuto says.

  • "They highlight the fact that the Fed’s ability to further influence forward rates is exceptionally limited."
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