- Dow Jones futures traded sharply higher in the pre-market session, leading to a positive open for the major indexes.
- The Federal Reserve’s landmark policy update is creating a new normal for inflation.
- Higher inflation via monetary policy could mean a further decline in the purchasing power of the U.S. dollar.
The Dow and broader U.S. stock market opened higher Friday after the Federal Reserve’s sweeping policy shift to boost inflation kept equities running hot.
Dow, S&P 500, Nasdaq Rally
All of Wall Street’s major indexes opened higher Friday, mirroring a strong pre-market session. The Dow Jones Industrial Average opened 109 points higher before quickly paring gains. The blue-chip index is currently up 0.2%.
The Dow Jones Industrial Average is fast-approaching its pre-pandemic highs. | Chart: Yahoo Finance
The broad S&P 500 Index of large-cap stocks rose 0.2%, where it was on track for new all-time highs. The technology-focused Nasdaq Composite Index jumped 0.6%.
Fed-Induced Inflation, Surging Yen Rattle the Dollar
The U.S. dollar is back on the defensive Friday in the wake of a landmark policy shift from the Federal Reserve. A surging yen also weighed on the greenback amid news that Japanese Prime Minister Shinzo Abe will resign due to health concerns.
The U.S. dollar index, which tracks the performance of the greenback against six major currencies, including the yen, plunged 0.7% to 92.34. With the decline, the greenback is once again plumbing two-year lows.
The U.S. dollar has erased much of its recent progress and is back within range of two-year lows. | Chart: Bloomberg
The central bank’s shift in monetary policy places more emphasis on full employment, which means inflation will be allowed to rise above the traditional 2% target. In the video below, Fed Chair Jerome Powell says the Federal Open Market Committee will let inflation rise higher during times of economic expansion. Watch the video below.
The Fed relies on the core personal consumption expenditure (PCE) index to monitor inflation. The index came in at 1.3% in July, which is well below the Fed’s target.
Max Keiser of the Keiser Report thinks real inflation is much higher than the official data indicate. | Source: Twitter
Not everyone is convinced that the United States has a low-inflation problem. Core PCE and the broader consumer price index have been criticized for understating inflation because they rely on substitution and a formula based on “constant level of satisfaction.” The methodology has undergone numerous revisions over the years, which skews inflation (and inflation expectations) lower.