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The Federal Reserve Presented on 27 August, its new strategy to tackle the crisis. The central bank will tolerate higher inflation from now on, if necessary to bring average inflation closer to its 2% target over the longer term. This announcement does not come as a surprise, as the central bank has been thinking about this for a long time. Plays.
Since the beginning of this year, the Fed has faced a major challenge. The corona crisis has hit the US economy hard, resulting in a drop in demand and rising unemployment. There is a danger that the economy will enter a negative spiral, which could escalate into a deflationary depression. An increase in the number of bankruptcies and defaults can put pressure not only on the real economy, but also on the financial sector.
The Fed therefore announced new measures to prevent the economy from falling into a deflationary spiral. With ever-increasing purchase programmes for government bonds and corporate bonds, it is trying to push the financial markets in the right direction. An additional effect of this is the expectation that everything will lead to more inflation. As a result, Americans will save less and spend more money, or so the theory goes.
In practice, however, it turns out to be a lot more unruly. While the Fed's stimulus programs pushed stock and bond prices to record highs, the growth of the real economy is hopelessly lagging behind. Due to the coronavirus, the economic outlook is uncertain, causing consumers to Reluctant to spend money and entrepreneurs postpone new investments. The consequences of this can be seen in higher unemployment and an increase in the number of Mortgage defaults.
The U.S. central bank is therefore taking a different tack to support the economy. It is now openly threatening to drive inflation, in the hope that consumers will spend more and finally take that money out of their savings accounts. The velocity of money, which is an absolute nadir has reached the point, has to go up again.
The problem is that the Fed can't directly influence that. It does not have the tools to force people to spend more money. That's why she's trying to impress the market by threatening higher inflation. How the central bank intends to achieve this remains completely unclear. So it remains to be seen whether this new strategy will work.
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This contribution was made from Geotrendlines
