Longer-term rates rose appreciably this week following a speech from Fed Chair Jerome Powell outlining the Federal Reserve's new approach to setting monetary policy. Spurred by years of inflation running below their 2% target, the Fed is modifying their target to focus on average levels of inflation over time. The move will allow inflation to run higher to compensate for the prior time spent below target.
The change shifts focus away from the potential risk of higher inflation which can accompany low levels of unemployment, meaning that the Federal Reserve will be slower to increase the Fed Funds target rate even after the economy and labor market recover. Viewed in a historical context, a similar approach would have kept the Fed funds rate at zero three years longer (until 2018) following the great recession. The week's economic releases were consistent with prior weeks as the housing sector remains robust while further weakness in labor markets was seen with another 1mm jobless claims.