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Powell Fed Embraces Monetary Relativity

"Trying to understand the way nature works involves a most terrible test of human reasoning ability. It involves subtle trickery, beautiful tightropes of logic on which one has to walk in order not to make a mistake in predicting what will happen. The quantum mechanical and the relativity ideas are examples of this."

Richard P. Feynman

New York | Over the past week, many thousands of words have been written regarding the latest pronouncement from the Federal Open Market Committee about inflation and monetary policy. Led by Federal Reserve Board Chairman Jerome Powell, the FOMC has discarded the statutory mandate from Congress regarding “price stability” and is now pursuing a long-term average for inflation based on the central bank's shifting definition of aggregate prices.

Many analysts offer as many reasons for this change, but the basic message to the markets is that interest rates now have a permanent downward bias. Whereas in the past the committee followed a measured and preemptive approach to managing inflation, now the FOMC intends to let inflation run at or above 2% for a while. How long? That is the difficult part in the new world of monetary relativity.