Federal Reserve Chair Jerome Powell signaled today that the central bank is considering key changes to its monetary policy framework.
“A framework should be robust to a broad range of conditions, but also needs to be updated periodically as the economy and our understanding of it evolve,” Powell said in his opening remarks at the Thomas Laubach Research Conference in Washington, D.C.
Powell indicated that the Fed is weighing changes to its 2020 framework, including reconsidering the language around shortfalls and average inflation targeting and potential enhancements to formal policy communications, particularly on the role of forecasts and uncertainty.
“Clear communication is an issue even in relatively placid times,” he said. “In periods with larger, more frequent or more disparate shocks, effective communication requires that we convey the uncertainty that surrounds our understanding of the economy and the outlook.”
Acknowledging that the economic environment has changed significantly since 2020, Powell said the Fed’s review will reflect those changes.
“Longer-term interest rates are a good deal higher now, driven largely by real rates given the stability of longer-term inflation expectations.”
Housing economists have also emphasized that interest rates are operating on a different dynamic now, which effectively will keep mortgage rates higher relative to the federal funds rate.
Powell further emphasized that these higher real rates may also reflect the possibility that inflation could be more volatile going forward than in the inter-crisis period of the 2010s.
“We may be entering a period of more frequent, and potentially more persistent, supply shocks—a difficult challenge for the economy and for central banks. While our policy rate is currently well above the lower bound, in recent decades we have cut the rate by about 500 basis points when the economy is in recession,” Powell said. “Although getting stuck at the lower bound is no longer the base case, it is only prudent that the framework continue to address that risk.”
Despite potential framework changes, Powell reaffirmed the Fed’s commitment to its 2% inflation target—a number questioned by some leading economists.
“Keeping longer-run inflation expectations anchored was a driving force behind establishing the 2% target in the 2012 framework…and we remain fully committed to the 2% target today.”
According to the latest PCE data the Fed chair referenced, inflation currently stands at 2.2%.
The 2025 review consists of three key elements: this week’s Thomas Laubach Research Conference, Fed Listens events and policymaker discussions and deliberations at the Federal Open Market Committee (FOMC) meetings.
While underway, the 2025 review and changes will be completed in the coming months, Powell said.
