There has been no shortage of epoch-changing twists so far this year. I mean, seriously, take your pick: even aside from the pandemic, we have riots on the streets of American cities, an alarming trade war, negative oil prices and gold briefly above $2,000/oz. These are just some of the loud, headline-grabbing changes that were once unthinkable but now form part of our new normal.
A much quieter shift, but equally transformative, started to make its presence more felt on Thursday, when the Chairman of the U.S. Federal Reserve, Jerome Powell, outlined a new focus for the institution: inflation will be allowed to run higher than the original 2% target “for some time” to make up for undershoots. In other words, inflation might rise in the short term, but don’t worry, we won’t raise rates.
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At first, the announcement seemed totally “meh” – the only surprise was that his remarks were not more remarkable. Given the colossal government debt, no one expected rates to be raised in the near future, no matter what inflation does.
But zooming out, Powell’s comments cement a radical shift in the role of arguably the most powerful central bank in the world. This is likely to influence more than just yield expectations: it could trigger a greater transformation of the Fed’s role.
This will, directly and indirectly, support the work going on in crypto markets. But more on that in a minute.
First, let’s look at a bit of history.
The founding Federal Reserve Act of 1913 did not specify any macroeconomic goals – the institution’s original mandate was to provide liquidity in order to avoid financial panics….