The Federal Reserve recently updated its view on monetary policy, and the changes will have broader implications for the economy as well as your investment portfolio. Here is a quick explanation of what the Fed has changed and what that change means for investors. Historically, the Fed has used the Fed Funds rate (the rate at which banks generally lend to each other) as a way to set short-term interest rates.
Investors raised their bets on higher U.S. inflation after Federal Reserve Chair Jerome Powell introduced a new strategy to allow the rate to rise above the 2% target, but market players still saw inflation remaining stubbornly below that level. The Fed will seek to achieve inflation averaging 2% over time, offsetting below-2% periods with higher inflation "for some time," Powell said at the central bank's annual summer symposium, usually held in Jackson Hole, Wyoming, but this year conducted virtually because of the pandemic. U.S. inflation, as measured by the consumer price index, has not run above 2% consistently since 2018.
A gauge of global equity markets jumped to an all-time peak on Wednesday, after the S&P 500 and Nasdaq rallied to fresh records on upbeat corporate results, while the dollar eased a day before the Federal Reserve possibly sets a new course on inflation. MSCI's all-country world index surged past the pre-COVID high reached in February as technology stocks jumped after Salesforce.com Inc raised its annual revenue forecast on surging demand for the company's online business software. "If you look at the stocks that are actually driving the rally and the companies that everybody is using, it really is a technology-leading society at this point, especially with COVID," JJ Kinahan, chief market strategist at TD Ameritrade in Chicago, said.