The US Federal Reserve recently announced an important change in its framework to achieve its mandate of “promoting maximum employment and stable prices”. The Fed will now be targeting an inflation rate of 2% on average over time, permitting periods of overshooting 2% to make up for previous undershoots.
Stocks like a solidly growing economy with a moderate degree of inflation, so the approach should be supportive for equities, at least over the medium term. However, a key question for investors is whether this shift in policy will lead to a marked acceleration of inflation at some point in the recovery, which could ultimately be damaging for equities and very unpleasant for bonds, or will the structural drivers of low inflation in recent decades persist? We discuss the triggers and implications of the experiment against the backdrop of the massive monetary and fiscal stimulus now in place not just in the US, but across the world.
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David is one of Australia’s leading investment strategists.