US Federal Reserve chair Jerome Powell delivered what many Fed watchers had been expecting at the annual Jackson Hole speech on 27 August, when he signalled a change to monetary policy goals.

In future the central bank will target average inflation, which means accepting periods of overshooting and undershooting the 2% target. Importantly the bank said it wasn’t tying itself to any formula, moving it away from a data driven approach.

Powell acknowledged that the historical trade-off between wage growth and inflation had weakened which means the Fed would be less likely to hike interest rates when the economy is operating at or close to full employment capacity.

The news pushed longer dated bond yields up (and prices down) as these are more sensitive to higher inflation, steepening the yield curve. This in turn gave a green light to the banking sector which jumped over 2%. Banks make a higher interest rate margin when the yield curve steepens.

As for the stock market, some strategists continued to push the argument that lower rates for longer was good news for stocks, and growth stocks in particular. However, this logic seems flawed to value investors who point out that a steepening yield curve and higher inflation are exactly what they need to perform.

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