Powell Signals Fed Policy Shift With Framework Review Underway

Federal Reserve Chair Jerome Powell said the economic environment has changed significantly since 2020, and the current framework review will reflect policymakers’ assessment of those changes.

Federal Reserve Chair Jerome Powell said Thursday that U.S. central bankers are considering changes to their monetary policy framework, including how they evaluate employment shortfalls and inflation targets.

Powell noted that the current framework — last updated in 2020 — was crafted in a period of persistently low inflation and interest rates. Since then, the economic environment has shifted markedly, prompting a fresh internal review.

“We will ensure that our new consensus statement is robust to a wide range of economic environments and developments,” he said.

He added that officials “have indicated that they thought it would be appropriate to reconsider the language around shortfalls. And at our meeting last week, we had a similar take on average inflation targeting” during his speech.

The policy framework serves as a guide for Federal Open Market Committee officials, who set interest rates. They aim to meet the broad goals assigned to them by Congress of fostering stable prices and maximum employment. Fed officials target 2% inflation.

Powell added in his address that the review will take into account changes in inflation dynamics, labor market behavior, and the diminished likelihood of hitting the so-called zero lower bound, where interest rates cannot be cut further.

Powell said the primary consideration in 2020 was keeping Americans’ long-term expectations for inflation close to 2%.

“Anchored expectations are critical to everything we do, and we remain fully committed to the 2% target today,” he said.

Still, he said the economic environment has changed significantly since 2020, and the current framework review will reflect policymakers’ assessment of those changes.

Powell stressed that the risk of hitting the zero lower bound is no longer the baseline scenario, but the framework should still account for it. 

He said the Fed plans to conclude its current policy framework review by the end of the summer.

Markets trended lower in morning trade. The SPDR S&P 500 ETF Trust (SPY) was down 0.2%, and the Invesco QQQ Trust (QQQ), which tracks the Nasdaq 100, dropped 0.4%. Meanwhile, the SPDR Dow Jones Industrial Average ETF (DIA) slipped 0.28%. 

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