Only a shift in labour’s bargaining power can light up US inflation

With his speech last week to the virtual Jackson Hole conference, Jay Powell, the chairman of the Federal Reserve, might have raised the curtain on the final act for the US dollar as the global reserve currency. It may not be the end, but it is the beginning of the end.

Mr Powell’s address largely conformed to news reports in the days running up to it. He said that the Open Market Committee would target average inflation — in a shift to Flexible Average Inflation Targeting, or FAIT, from Flexible Inflation Targeting — and that monetary policy decisions would be informed by the assessment of the shortfall from the undefined maximum employment level.

The wide latitude that the central bank has assumed to keep interest rates lower for longer does not bode well for the US dollar. If the Fed were to be seen as tolerant of high inflation to make up for low inflation in the past, faith in the dollar as a store of value will be eroded. For a global reserve currency, that would be strategically costly.

Inflation has remained dormant for so long not because central banks were successful in taming it. Former Fed chairman Paul Volcker brought down price rises in the 1980s, but at the cost of two recessions. Afterwards, expanding global trade, the decline in the crude oil price and the…

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