The Federal Reserve (Fed) has announced on Thursday that it will be trying to push higher inflation numbers to adjust for the economic activity caused by the novel coronavirus pandemic. They believe this to be an extension of their long-term goal of raising employment in the country.
The way the Fed is trying to accomplish this goal is by keeping interest rates as they are now to make it possible for the inflation rate to rise on its own. At this moment they are aiming to surpass the 2 percent inflation number which was the long-term goal previously. The Fed believes that this will allow them to fight further recessions as well.
During his statement, the Fed Chair Jerome Powell has come out saying that until now the inflation rate would always go up while the labor market strengthens. This means that the central bank would raise interest rates before the labor market growth would reach the limits to adjust for soaring inflation. This was successfully utilized during the recession period in the 1970s. This announcement happened during the Jackson Hole conference which was hosted virtually by the Kansas City Fed.
Experts believe that this gradual change of heart is caused by the fact that keeping the interest rates low would not boost inflation as much as they believed before. The argument is quite self-explanatory once we look at the statistics of February 2020 when the unemployment rate stood at the 50-year-low of 3.5 percent while the inflation rate was still somewhere around 2 percent. This has caused the central bank to try to balance out the average inflation rate during the years since until now it was always situated under a 2 percent mark. The novel coronavirus pandemic has been affecting the US economy in a very adverse way. The social distancing laws caused by as much as 6 million infections and 183,000 deaths as well as huge riots caused by the death of George Floyd has interrupted the process of economic development which will last for the years to come to the point where a number of government officials are doubting if the central bank will even succeed in driving the prices up in rapid succession.
Higher inflation rates pose huge risks for forex brokers in general. This has mostly to do with the methods they allow traders to trade with. The main concern is associated with the forex trading lots in general. In most cases, it’s completely fine with traders who mostly target smaller lots like nano or micro, but for those who go for standard size lots it’s much harder to iron out why their trade is suddenly worth so much less. Based on the information and market analysis provided Axiory, it’s quite obvious why inflation would impact the larger lots. Micro lot is about 1000 units of currency and a 1% change in inflation isn’t too dangerous. But when there are 100,000 units in a standard lot 1% is already a $1000 difference, which is significant.
The market uncertainty creates fear of sharing the fate of Japan where it has been struggling with deflation and slow growth for decades already. This can be seen in the foreign exchange market (FX, Forex) as the exchange rates on have been jumping around in more of a chaotic way than before. This caused great concern to the traders and brokers alike as the market is risky to trade in general but with the worldwide processes going on in the same way as they are right now the problems keep rising. A great number of traders are just panic opening and closing their positions which is not the way to go about the current situation causing them to lose money mostly due to overextending.
The increase in interest rates is directly tied to the stimulus that the Fed can provide during the pandemic. The more rates run closer to zero the less ability the Fed has to support the economy during the economic downturn by just cutting these federal funds rates. This may result in a much worse economic situation with high unemployment rates and more price volatility on general goods. This will be harder to manage for the people who are already living on a low income.
It is worth noting that this decision by the Fed is one of the biggest overhauls of their long-term strategy that has been set in stone for as much as 8 years already since 2012. They have been trying to push the idea that everything is being done to create a maximum employment mandate with broad-based and inclusive goals. So the point is that instead of focusing on the overall picture and trying to reach some specific level of unemployment in order to keep the inflation numbers in check the central bank will be focusing on more specific branches of the economy where they believe that the job market is not penetrating through to the public.
Powell said that “One of the clear messages we heard was that the strong labor market that prevailed before the pandemic was generating employment opportunities for many Americans who in the past had not found jobs readily available,” adding “A clear take away from these events was the importance of achieving and sustaining a strong job market, particularly for people from low- and moderate-income communities,”
He also tried to urge other policymakers to focus on returning the American people to their workplaces as soon as possible.
Sources: federalreserve.gov / bls.gov / cdc.gov