Federal Reserve Considers Abandoning 2% Inflation Target

By Doug Young – 11 April 2024

Introduction

The Federal Reserve, one of the world’s most influential central banks, is reportedly contemplating a significant shift in its approach to inflation targeting.

Renowned economist Mohamad El-Erian believes this potential change could have a positive impact on precious metals. This news has sparked interest among investors and economists alike, as it could signal a departure from the Fed’s long-standing commitment to maintaining a 2% inflation target.

Federal Reserve’s Historical Position on Inflation

In the face of high inflation, Federal Reserve Chair Jerome Powell had previously cautioned against prematurely loosening policy. However, despite the Fed’s efforts to curb inflation, it has remained stubbornly persistent.

The core Consumer Price Index finally showed a decline last December, but it has been decreasing at a slow pace. As of last month, the core CPI stood at 3.8%, nearly double the Fed’s 2% inflation target.

Fed’s March Policy Meeting

Leading up to the Fed’s March policy meeting, concerns were mounting that persistent inflation and a tight labor market might prompt officials to deviate from their earlier projections of rate cuts.

Despite that, the meeting concluded with the reaffirmation of their plans for three rate cuts before the end of the year. Fed Chair Jerome Powell emphasized their commitment to these plans during his post-meeting press conference, even suggesting that policymakers are willing to take their time in bringing inflation back down to 2%.

Economist’s Perspective on Fed’s Inflation Target

Economist Mohamad El-Erian believes that the Fed’s decision to maintain a restrictive monetary policy risks pushing the economy into a recession.

He suggests that the central bank is now faced with a choice: accepting modestly higher inflation or risking a downturn. Aran’s view is that this unexpected wavering by the Fed may indicate a shift towards a broader concept of an inflation target, rather than a strict 2% target.

Potential Impact on Precious Metals

A potential change in the Fed’s approach to inflation targeting could have significant implications for precious metals. Historically, reducing rates during periods of elevated inflation has led to lower real yields and a weaker dollar. This, in turn, has traditionally strengthened gold and silver.

JP Morgan strategist Greg Shearer has projected that a Fed cutting cycle, coupled with falling US real yields, could drive a breakout rally for gold later in 2024. He even suggested that $2,500 per ounce is a possibility.

Conclusion

While Federal Reserve Chair Jerome Powell has repeatedly stated that the central bank will not abandon the 2% inflation target, recent statements and actions seem to indicate a potential shift in their stance.

This unexpected move by the Fed has raised questions about the future of inflation targeting and its implications for the economy. If the Federal Reserve does indeed adopt a more flexible approach to inflation, it could have a positive impact on precious metals.

Investors and analysts will be closely monitoring any developments in this regard, as it could shape investment strategies and market trends moving forward.

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