The Federal Reserve’s recent Jackson Hole announcement about allowing inflation to ‘run hot’ presents investors with a dilemma. Arguably, for the first time in 14 years we’re looking at a transition from a deflationary environment to an inflationary one. That shift in mind-set could be profound.
But the Fed announcement also poses more questions than it answers. What does allowing inflation to run above 2% ‘for some time’ actually mean? How long are you going to let the economy run hot for? How hot are you going to allow it to get? What metrics will you use to measure how hot things have become? As of now, no one outside the Federal Reserve actually knows for sure. All these questions are out there to be answered.
The announcement also raises the spectre of inflation against a backdrop of falling wages, depending on how the Covid-19 pandemic works its way through the global economy. If this were the case, we would be heading into an economic environment we haven’t witnessed, in the US and Europe at least, since the 1970s and 1980s. All told, it makes for murkier guidance from the central bank than we’ve been used to for some time.
Curt Custard, chief investment officer, Newton Investment Management.