August 27, 2020

While the S&P 500 and NASDAQ rallied all day yesterday, and both closing at new all-times, highs, the Dow struggled to reach positive territory by the end of trading.  On the day, the S&P 500 and NASDAQ gained 35.11 and 198.59 points, or +1.02% and 1.73%, respectively.  The Dow worked hard to gain 83.48 points, or 0.3%.

Today, Federal Reserve Chairman Jerome Powell announced a major shift to what he called “average inflation targeting.”  Recognizing the Fed’s long-term inflation target of 2%, average inflation targeting means that the central bank will be more inclined to allow inflation to drift higher that its normal target. Their stated goal is to support the sensitive labor market and the broader economy.

The situation, Powell said, “can lead to an unwelcome fall in long-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever lower inflation and inflation expectations.”  Policymakers are then left with little room to lower interest rates during times of economic stress.