When Federal Reserve Chair Jerome Powell gives his last speech in Jackson Hole, Wyo., this Friday, investors will be listening for whether he signals an interest rate cut next month. But Powell could lay out more overarching changes to the central bank’s dual mandate that will last long after his tenure is up next May — and mark part of his legacy.
Powell will share his outlook for the economy at Jackson Hole. But he is also expected to lay out changes to the central bank’s policy framework review, which articulates the Fed’s strategy and commitment to fulfilling its congressional mandate for stable prices and maximum employment. In particular the central bank is expected to drop so-called average inflation targeting, a policy put in place pre-pandemic when inflation was running low and Fed officials wanted to avoid deflation.
The strategy laid out that if inflation ran below 2% in years past, the Fed would tolerate it running above 2% in the future on the theory that it averages out. Given the recent spout of inflation, and the risks it poses to inflation expectations and consumer sentiment, the Fed is expected to drop that and focus on an inflation target of simply 2%.
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Powell signaled the change in a speech in May.
“In our discussions so far, participants have indicated that they thought it would be appropriate to reconsider the language around shortfalls,” Powell said. “And at our meeting last week, we had a similar take on average inflation targeting.”
The Fed first created its monetary policy framework in 2012, which it adjusts every five years. The Fed is revisiting changes made to its strategy for monetary policy, tools, and communication last changed in 2020 before the pandemic set in.
Just as the changes announced back in 2020 had implications for monetary policy actions over the past five years, so could the changes Powell announces Friday send ripples for years to come.
Some Fed watchers believe the Fed’s strategy of letting inflation run a bit above 2% to make up for previously lower inflation led in part to the central bank’s delayed action to raise rates when inflation took off following the pandemic. The thought that the inflation from supply chain bottlenecks was temporary led the Fed to hike rates at the most aggressive pace since the 1980s.
“While the adoption of the new framework in 2020 was not the primary factor behind the Fed’s delay and the substantial inflation overshoot, it contributed to this outcome,” said Matt Luzzetti, chief US economist for Deutsche Bank. Luzzetti says, as a result, he expects Powell’s speech to restore a more preemptive strategy for monetary policy, along with recognizing risks of supply shocks and a return to a balanced view of inflation and the job market.
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