EME Macro/Strategy: Don’t go against the Fed, but mind the gap

The Jackson Hole symposium, held last week, delivered three important messages, in our view, relevant for financial markets’ outlooks going forward. The first one is that the Fed will try to aim for average inflation of 2%, signalling some tolerance for letting inflation move a little higher than usual for a while, to offset a period of below-target inflation. This is in line with what we suggested in our recent report (published on 11 August), which discussed the long-term implications of QE and inflation through to 2030E. The second key message from President Powell was that a tight labour market helps to address racial inequality, and the experience of the past decade shows that it does not put the inflation mandate in jeopardy. Therefore, going forward, a tight labour market would not be such a source of concern for the MPC. The third important message came from the panel discussions, not the Fed directly, and were related to the growing monopolistic behaviour in the corporate sector leading to lower potential growth. This is something we have flagged as critically problematic, especially for Europe, and it extends beyond the remarks made during
the symposium.