US Fed to tread carefully towards monetary policy normalisation

Doha: Every summer, the US Federal Reserve (Fed) organises a coveted economic policy symposium in Jackson Hole, Wyoming. The event is one of the longest-standing central banking conferences in the world, bringing together top economists, bankers, market participants, academics and policy makers to discuss long-term macro issues. 

During the Jackson Hole Symposium last year, which was also held virtually due to Covid-19 concerns, the Fed formally announced its new monetary policy framework, in which inflation is targeted to average 2 percent over time. Under such framework, the 2 percent target should be achieved over the business cycle, implying that past inflation deviations from this target have to be partially or fully compensated in the future or “averaged.” While this Fed-led symposium always looms large in the agenda of investors, this year the importance of the event was paramount. It followed a period of extraordinary policy support against the Covid-19 shock, a record-breaking economic recovery and a significant overshoot in US inflation. In fact, the US core personal consumption expenditures price index (PCE), the Fed’s favourite gauge for inflation, spiked by 3.6 percent year-on-year (y/y) in July 2021, the highest rate in 30 years.