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The focus this week fell on the announcement of Fed’s monetary policy review. The Fed has announced that the agency will be adopting the average inflation targeting framework moving forward.

The average inflation which the Fed will be targeting is 2%. This would mean that the inflation will be allowed to overshoot or undershoot 2%, depending on past inflation rates to achieve an average of 2% over time. Previously, inflation rate target was set strictly at 2% and past inflation rates were not taken into consideration.

Having said that, the inflation rates for the past few quarters have been below 2%. The Fed will not intervene with the inflation rate, by raising interest rates, when it reaches 2%. It will be allowed to overshoot 2%. Therefore, the environment we are looking at in the short to medium term will be of low interest rates and raising inflation.