Kathy Jones, chief fixed income strategist at Charles Schwab, points out that the Federal Reserve’s new strategy reinforces their prospect of low rates for a longer period and a weaker US dollar.
“The change suggests that the Fed will likely maintain its zero interest rate policy for several years until it sees inflation rise, rather than acting preemptively to meet inflation expectations.”
Powell’s speech is important in that it codifies the Fed’s policy approach. However, that’s not a big change from the way the Fed has operated for quite some time now. It will help set expectations regarding the policy by identifying the key factors that are important to the Fed. However, there is little that monetary policy can do. The biggest risk to the policy change is that long-term rates could rise assuming the Fed doesn’t respond to inflation quickly enough to contain it.
“The Fed’s policy announcement reinforced our point of view. We expect the Fed to keep short-term interest rates low for several years and for the US dollar to weaken further over time. “