The Fed chair, Jerome Powell, used the annual Jackson Hole Economic Symposium on 22 August to confirm a formal reset of the Fed policy framework, abandoning the average-inflation “make-up” strategy, removing Effective Lower Bound (ELB) centric language, and restoring a balanced approach to dual-mandate trade-offs.
He also indicated a looser policy going forward with a revised statement on “longer-run goals and monetary policy strategy, even as tariffs push prices up and labour market risks edge higher.
Jerome Powell had a twin message for the meeting attendees: a cautious (read looser) near-term stance and a material framework rewrite.
On the outlook, he said, “The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts.”
However, he reassured investors by saying: “Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem.”
He said that the balance of risks to the Fed’s dual mandate is now two-sided, with risk on the upside for inflation and the downside for employment. This leads to his main policy message: “Monetary policy is not on a preset course. FOMC members will make these decisions, based solely on their assessment of the data and its implications for the economic outlook and the balance of risks.”
Alongside the speech, the Fed published a revised policy blueprint statement on longer-run goals and monetary policy strategy, which describes how the Fed will pursue its dual-mandate goals. Powell said: “It is designed to give the public a clear sense of how we think about monetary policy.”
Powell highlighted four headline changes since his 2020 speech.
First, ELB is being deemphasised. “We removed language indicating that the ELB was a defining feature of the economic landscape,” Powell said. The statement now emphasises, “monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions.”
Second, the “make-up” inflation strategy is being disavowed. Powell stated: “In retrospect, there was nothing intentional or moderate about the inflation that arrived a few months after we announced our 2020 changes. ”Third, language around shortfalls has been removed. The text now states that “the Committee recognises that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability.”
Finally, the Fed’s balanced approach has been clarified. When the dual mandate goals are in tension, the Fed will aim to have a balanced approach in promoting them.
Powell noted that the statement is now closer to the 2012 language and considers the size of departures from goals and different return horizons.
Powell also underscored: “We also continue to view a longer-run inflation rate of two percent as most consistent with our dual-mandate goals.”
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