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Markets react to historic shift for the Fed at Jackson Hole

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·Finance and policy reporter
·3-min read
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Federal Reserve Chairman Jerome Powell, wearing a face mask, testifies before the House of Representatives Financial Services Committee during a hearing on oversight of the Treasury Department and Federal Reserve response to the outbreak of the coronavirus disease (COVID-19), on Capitol Hill in Washington, U.S., June 30, 2020. Tasos Katopodis/Pool via REUTERS
Federal Reserve chairman Jerome Powell. Photo: Tasos Katopodis/Pool via Reuters

Stocks wobbled in Europe and the US on Thursday as the chair of the Federal Reserve set out details of an historic shift in central bank policymaking.

The US central bank chairman Jerome Powell said it would tolerate inflation “moderately” above its 2% target in a speech at the virtual Jackson Hole summit of central bankers.

Powell announced a move as expected towards average inflation targeting over time, rather than trying to consistently hit a 2% target. He said policymakers had unanimously agreed after a major review that inflation would be allowed to run above target “for some time” after periods persistently below 2%, though further detail was limited.

The Fed has been reviewing its monetary policy framework for the past two years, looking at how to adapt to a period of consistently low interest rates and inflation.

READ MORE: Rolls-Royce loses £5.4bn as CFO quits

Powell was speaking at a virtual version of the Jackson Hole Economic Symposium, an annual summit of central bankers and other business and political leaders. The Kansas City Federal Reserve normally hosts the event in the Jackson Hole ski resort in Wyoming.

Neil Wilson, chief market analyst at Markets.com, said it signalled rates would be lower for longer, with a shift towards focusing on “supporting the economy, not prices.”

European stocks were choppy as Powell spoke, falling and then rising but staying in the red having opened lower on Thursday morning. Markets were “trying to make sense of the changes,” added Wilson.

READ MORE: Fed chair Powell sets out efforts to target ‘moderately’ higher inflation

The pan-European STOXX 600 index (^STOXX) fell 0.6%, and London’s FTSE 100 (^FTSE) closed down 0.8%. with the latter dragged also down by pre-tax losses of £5.4bn ($7bn) at engine maker Rolls-Royce (RR.L).

Germany’s DAX (^GDAXI) shed 0.7%, while France’s CAC 40 (^FCHI) lost 0.6%.

US stock futures had been trading lower early on Thursday, but Wall Street opened higher and continued to hit fresh highs as Powell set out the Fed’s new position.

The S&P 500 (^GSPC) was up 0.4%, the Dow Jones (^DJI) rose 0.8% and the Nasdaq (^IXIC) rose 0.2% as European markets closed.

In Asia, Shanghai’s SSE Composite Index (^SSEC) had 0.6% overnight, but the Hang Seng (^HSI) closed 0.9% lower and Japan’s Nikkei (^N225) lost 0.4%.

READ MORE: BoE chief economist: Central banks can only plan ‘modest’ role tackling inequality

CMC Markets analyst Michael Hewson expressed scepticism about whether the Fed’s widely anticipated change of stance was as significant as thought by some, however. “I’m not altogether sure how this is any different to what central banks have been doing for the past twelve years, and appears to come across as rather desperate.”

In a note before Powell spoke, Hewson said the Fed’s room for manoeuvre after radically loosening policy earlier this year was “somewhat limited” without US politicians breaking the deadlock over fiscal stimulus.

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