Home > FAIT – The Focus on Tomorrow’s Fed Meeting

FAIT – The Focus on Tomorrow’s Fed Meeting

September 15, 2020 By Mircea Vasiu

The main event of the trading week is scheduled for tomorrow. During the North American session, the Fed is scheduled to release its interest rate policy and guidance for the period ahead. 

While no one is waiting for the Fed to do something specific, it does not mean that the meeting has no importance. In fact, it is because of this meeting that the USD keeps a bearish tone, and the U.S. equities find support on each and every dip lower.

Flexible Average Inflation Targeting

The Fed has a hard time explaining markets why higher inflation is good for an economy. The market expects more details tomorrow about the new FAIT mandate (flexible average inflation targeting) and what exactly the Fed’s plan is moving forward.

If at this week’s meeting, the Fed does not manage to clearly communicate what the new mandate stands for, the risk for a USD comeback is real. In other words, the market will force the Fed’s hand, should it not deliver more clarity.

The idea of FAIT was launched at the Jackson Hole Symposium this August. The USD traded with a bearish tone all summer in expectations of a change from the Fed. The change came, but the message did not deliver precisely what the Fed expects in terms of inflation. In other words, how flexible the Fed intends to be, and is there any methodology to calculate average inflation as desired by the Fed?

It is very likely that the Fed left all these questions unanswered for a reason. If and when you give the market a threshold, the reaction to any development closer or far away from it is usually more aggressive than otherwise will be the case. Therefore, what the Fed wants is to keep some ammunition for itself, at least when it comes to forward guidance.

Many market participants already believe that the Fed is cornered, trapped in continuous accommodation. If that is the case, higher inflation is unlikely to materialize anytime soon unless it becomes self-fulfilling.

In other words, if the population and the market participants believe the Fed is able to create inflation, the Fed will have an easy time reaching its new mandate. So far, stocks are up, Bitcoin is up, gold is up, silver is up, dollar is down.

Judging by this metric, inflation is coming. Any hint by the Fed tomorrow that it eases the monetary policy further will send the USD much lower.

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Fed