The United States’ inflation target is going to be changed, and the Federal Reserve is paving the way.

The key points of Powell’s latest speech yesterday are summarized as follows:

· First, the current policy framework is based on the assumption of low inflation and low growth.

· Second, there seems to be a structural rise in real interest rates over the past few years, making inflation more volatile.

· 3. The Federal Reserve originally adopted the traditional inflation targeting system, anchoring inflation at 2%.

Judging from recent data and Powell's speech, the Fed is unlikely to cut interest rates in the short term. On the one hand, although inflation has eased, it has not yet reached a level that the Fed is comfortable with. Key factors such as core service inflation and housing costs still support inflation. If interest rates are cut at this time, it may trigger a rebound in inflation. On the other hand, the US economy still has a certain degree of resilience, the job market is performing well, and consumption and investment are relatively stable, which makes the Fed lack an urgent need to cut interest rates in the short term to stimulate the economy. The market's expectation of keeping interest rates unchanged in June has risen to 95%, and the expectation of the number of interest rate cuts this year has also been reduced from three to one or two, reflecting the market's general judgment on the Fed's short-term policy direction.

Now the Fed is considering revising the consensus statement, which is the document that says inflation is 2% in black and white. What does it mean? All the clues in the speech can be put together into one sentence: the 2% inflation target is likely to be rewritten.

Powell is sending a signal that the era of low inflation and low interest rates after 2000 may have been permanently changed by the epidemic. After the epidemic, real interest rates have risen, and inflation may naturally be higher. If the environment changes, the policy logic based on past data should also be overturned. This does not mean that the Fed's short-term policy will change immediately.

But if one day they really announce that the inflation target will be raised from 2% to 3%, don't be surprised, the road is being paved today. This means that the Fed will not lower interest rates back to the pre-pandemic floor level. For example, the past 2% inflation plus 2.5% federal funds rate is no longer the standard for neutral interest rates. Now it may be 3% inflation plus 3.5% interest rate.

From a long-term perspective, the Fed is adjusting its overall policy-making framework to respond to significant changes in the outlook for inflation and interest rates after the pandemic in 2020. Powell said that the Fed will review certain aspects of the strategic framework based on the experience of the past five years, and will also consider improving the committee's policy communication tools for predicting uncertainty and risk. This adjustment may imply that in the long run, as the economic structure evolves and the inflation situation stabilizes, the Fed will cut interest rates at some stage in the future. However, this interest rate cut is not something that can be achieved in the short term, but is based on a comprehensive assessment of the economic situation and the adjustment and improvement of the policy framework. Long-term interest rates may rise. #CPI数据来袭