Good day. By signaling it wanted inflation to rise modestly above its 2% target, the Federal Reserve may have revealed how inflation targeting, widely adopted over the last quarter century, might have outlived its usefulness in a world of lower interest rates. Meanwhile, Bank of Canada leader Tiff Macklem warned that unconventional monetary policies are challenging perceptions of central banks’ independence, calling for increased engagement with the public. 

 Now on to today’s news and analysis.

The Fed approved a major shift in how it sets interest rates by dropping its longstanding practice of pre-emptively lifting them to head off higher inflation, a move likely to leave U.S. borrowing costs very low for a long time. The revamp is designed to address the “reality of a quite difficult macroeconomic context of low interest rates, low inflation, relatively low productivity, slow growth and those kinds of things,” said Fed Chairman Jerome Powell during a conference broadcast online. “We’ve really got to work to find every scrap of leverage in helping stabilize the economy.”

• Strategy Expected to Benefit Job Seekers, Homebuyers, Stock Investors
• U.S. Government Bond Yields Rise After Fed Policy Shift
• WSJ Video: What the Fed’s Policy Shift Means for Interest Rates

The Fed said it would seek to achieve its 2% inflation goal on average, in what central bank leader Jerome Powell referred to as a system of flexible inflation targeting. Left undefined was how the Fed will find this “average” of inflation. Read more.

• BOC Chief Braces for Long, Bumpy Recovery

The Bank of Japan's easing is unlikely to change all of a sudden given that Gov. Haruhiko Kuroda continues to leads the central bank, but some investors may start questioning the sustainability of the policy after the resignation of Prime Minister Shinzo Abe, according to Fumio Matsumoto, chief strategist at Okasan Securities. (Dow Jones Newswires) 

• Shinzo Abe Will Resign as Japan’s Prime Minister, Citing His Health

• Ant’s Giant IPO Avoids U.S. Markets but Embraces U.S. Banks

8:30 a.m.: U.S. Commerce Department releases July personal income and outlays
8:30 a.m.: U.S. Commerce Department releases July advance economic indicators report
9:05 a.m.: Bank of England’s Bailey speaks at virtual Kansas City Fed economic policy symposium
10 a.m.: University of Michigan releases final August U.S. consumer sentiment

12:30 a.m.: Reserve Bank of Australia releases policy statement

"Investors can’t decide how Covid-19 will affect consumer prices," Jon Sindreu writes at Heard on the Street. "Some dread deflation in an environment of weak demand, whereas others are protecting themselves against the opposite: The risk that a fiscal bonanza from Congress and aggressive monetary stimulus by [central banks] could bring back the dangerous combination of inflation and unemployment that plagued the 1970s...Before rethinking their investment strategies, though, investors should remember that Wall Street has a history of misunderstanding inflation—even very recently."

• Hurricane Laura narrowly missed the heart of America’s fuel-making and chemicals infrastructure along the Gulf Coast, but a chlorine fire in Louisiana Thursday threatened the Lake Charles metro area.
• The World Bank said it is halting publication of its flagship report on business competitiveness to investigate irregularities as data about China, Azerbaijan, the United Arab Emirates and Saudi Arabia appeared to have been inappropriately altered.
• Chinese companies are borrowing less from U.S. bond buyers, as the deep pools of dollars held by investors in Asia means the region can be more self-reliant for hard-currency funding.
• Germany paused any further loosening of coronavirus rules and introduced new restrictions, in the latest instance of a European nation moving to tackle a resurgence in infections driven by tourism and summer festivities.
• The European Commission's Economic Sentiment Indicator rose to 87.7 in August from 82.4 in July, well above its April low of 64.9, but also well below its February peak of 103.4. (Dow Jones Newswires) 
• China's official manufacturing PMI likely edged up to 51.2 in August, according to the median forecast of eight economists polled by The Wall Street Journal. That would compare with 51.1 in July. (DJN) 
• Switzerland's GDP contracted by 8.2% in the second quarter from the previous quarter, marking its worst decline in the country's modern history. (DJN)
• German companies are scaling back layoff plans, according to the Ifo institute, which said its employment barometer climbed to 95.4 points in August from 93.2 points in July. (DJN)
• French manufacturing sentiment continued its recovery for the fourth consecutive month in August, according to national statistics agency Insee’s monthly survey, which showed sentiment in the sector rose to 93 in August from 82 in July. (DJN)

This newsletter is compiled by James Christie in San Francisco and Ed Ballard in London. 

Send us your tips, suggestions and feedback. Write to:

Jon Hilsenrath, Michael Derby, Nell Henderson, Nick Timiraos, Jason Douglas, Paul Hannon, Harriet Torry, Kate Davidson, David Harrison, Kim Mackrael, Tom Fairless, Megumi Fujikawa, Michael Maloney, Paul Kiernan, James Glynn

Follow us on Twitter:

@WSJCentralBanks, @NHendersonWSJ, @michaelsderby, @NickTimiraos, @PaulHannon29, @wsj_douglasj, @HarrietTorry, @KateDavidson, @d_harrison, @kimmackrael, @TomFairless, @megumifujikawa, @mikemaloneyny, @pkwsj, @JamesGlynnWSJ