The Blubber

Federal Reserve Chair Jerome Powell said Thursday that U.S. central bankers are reassessing key assumptions about inflation and employment that underlie their current monetary policy framework, in light of the recent inflation surge and the likelihood that supply shocks may become more common in the future.

“We may be entering an era of more frequent—and potentially more persistent—supply shocks. That presents a difficult challenge for the economy and for central banks,” Powell said in opening remarks at a two-day conference reviewing the Fed’s monetary policy strategy, which was updated in 2020 during the economic fallout from the pandemic.

“The economic landscape has shifted considerably since 2020, and this review will take those changes into account,” Powell added.

While Powell avoided commenting directly on the current path of interest rates or short-term economic projections, he did say that inflation, as measured by personal consumption expenditures in April, is likely to have fallen to 2.2%. That figure, while moderate, does not yet reflect the inflationary effects of recent tariff hikes, he noted.

Still, Powell described the post-pandemic inflation decline as a “historically unusual outcome,” in which prices cooled without causing major harm to the economy—a so-called “soft landing” that occurred under the Fed’s current policy framework. Unemployment stands at 4.2%, up slightly from a year ago but still consistent with the Fed’s estimate of full employment.

However, Powell's remarks indicate that the central bank may be pivoting toward a strategy that more proactively addresses future inflation risks—something critics say was lacking when the Fed was slow to respond to the inflation spike in 2021.

The Fed’s caution on inflation has also influenced how it’s approaching the effects of tariffs implemented under the Trump administration. Those trade measures have complicated assessments of economic momentum, and officials are still working through how the pandemic and evolving global trade dynamics have reshaped the broader economic environment.

For instance, the decades-long trend toward globalization and integrated supply chains that helped keep inflation in check may now be reversing, as firms prioritize more resilient supply systems amid rising trade tensions.

For now, the Fed has opted to hold interest rates steady in the 4.25% to 4.5% range while these issues play out.

Meanwhile, policymakers have been engaged in discussions about potentially revising their long-term policy framework—a document that sets the Fed’s 2% inflation target and outlines how it balances that with its mandate to support maximum employment.

In 2020, the Fed introduced a major shift by signaling greater tolerance for low unemployment and a willingness to let inflation run above target temporarily to make up for prior shortfalls. But Powell said that in retrospect, that framework may need to evolve.

“In our review so far, participants have suggested that we reexamine the language around employment ‘shortfalls,’” he said. That 2020 adjustment was meant to de-emphasize low unemployment as a red flag for inflation.

He added that officials had also re-evaluated their approach to “average inflation targeting” at a recent policy meeting. “We want to ensure our updated framework is resilient to a wide variety of economic conditions.”

While the 2020 strategy was seen as a bold shift toward supporting the labor market more aggressively, Powell acknowledged that the idea of deliberately letting inflation exceed 2% to compensate for earlier weakness “has not played a relevant role in policy discussions,” especially in light of the rapid inflation surge during the post-COVID reopening.