The Most Dovish Fed in History Is on a Mission to Spur Inflation

Federal Reserve Chair Jerome Powell has done everything to demonstrate his desire for higher inflation short of dressing up as a dove and cooing in front of Fed headquarters. In August he unveiled a policy that not just tolerates but seeks periods of inflation above the Fed’s 2% target. “The labor market is recovering, but it’s a long way—a long way—from maximum employment,” Powell said at a Federal Open Market Committee press conference in September. Asked whether the Fed wants to get unemployment back down to 3.5% or below—a degree of labor market tightness that previous Fed chairs feared would set off spiraling inflation—he said, “Yes, absolutely.”

Powell’s pro-inflation message isn’t having the intended effect, though. The Fed’s low rates have pumped up the stock market. But if the financial markets were taking him at his word, long-term interest rates would be leaping to compensate investors for higher inflation’s impact on the purchasing power of their bonds’ coupon payments. Not yet: The yield on the 30-year Treasury bond is still just 1.6%, up from 1.4% the day before Powell’s Aug. 27 speech at this year’s virtual version of the annual central banking conference held in Jackson Hole, Wyo. A yield that low implies that either investors don’t think Powell can achieve 2% inflation, or they’re resigned to 30 years of negative inflation-adjusted returns. Either possibility is depressing.