No. of Recommendations: 8
When the Federal Reserve changes its framework for evaluating the economy it's a real Macroeconomic trend change.
https://www.wsj.com/opinion/jerome-powell-federal-...Powell Flips the Fed’s ‘Framework’
The central bank abandons its 2020 idea that inflation above its target can be useful.
By The Editorial Board, Wall Street Journal
Federal Reserve Chair Jerome Powell sent equity markets soaring Friday with his dovish language signaling easier monetary conditions ahead. What may be more important in the long run, however, is that Mr. Powell and the Fed reversed their policy “framework” language from 2020 that signaled greater tolerance for inflation. The framework emerges from the Fed’s periodic review of its basic policy assumptions and guidelines.
The Fed in 2020 adopted what it called “flexible average inflation targeting.” That’s Fed-speak for saying the central bank would tolerate inflation higher than its 2% target for a time to compensate for inflation that was lower than 2% for a period. ...
The Fed said sayonara to this on Friday, returning to plain old “flexible inflation targeting”—with the target being 2% inflation. ...[end quote]
Here is the link to the Fed's announcement.
https://www.federalreserve.gov/newsevents/pressrel...August 22, 2025
Federal Open Market Committee announces approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy
The Federal Open Market Committee (FOMC) on Friday announced the unanimous approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates the Committee's approach to monetary policy and serves as the foundation for its policy actions. The updated statement, also commonly known as the consensus statement, emphasizes that the FOMC's monetary policy strategy is designed to promote the congressionally-assigned goals of maximum employment and stable prices across a broad range of economic conditions for the benefit and well-being of all Americans.... [end quote]
Here is the link to the Statement on Longer-Run Goals and Monetary Policy Strategy.
https://www.federalreserve.gov/monetarypolicy/mone...
....
The Committee's monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions. Employment, inflation, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Monetary policy plays an important role in stabilizing the economy in response to these disturbances. The Committee's primary means of adjusting the stance of monetary policy is through changes in the target range for the federal funds rate. The Committee is prepared to use its full range of tools to achieve its maximum employment and price stability goals, particularly if the federal funds rate is constrained by its effective lower bound....
Price stability is essential for a sound and stable economy and supports the well-being of all Americans. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee can specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory maximum employment and price stability mandates. The Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances. The Committee is prepared to act forcefully to ensure that longer-term inflation expectations remain well anchored...
The Committee's employment and inflation objectives are generally complementary. However, if the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the extent of departures from its goals and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. The Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability. ... [end quote]
The Fed's constant tinkering with the economy is described in "21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19," by Ben S. Bernanke. Nowhere in the book does retired Fed Chair Bernanke hint that maybe the Fed made major mistakes along the way, creating the environment for the 2008 housing bubble and financial crisis for example. It's clear that the new Fed framework intends to follow the same model of constant tinkering.
https://www.amazon.com/21st-Century-Monetary-Polic... The Statement is loaded with Fed-speak. I have bolded a couple of examples.
"The Committee is prepared to use its full range of tools to achieve its maximum employment and price stability goals, particularly if the federal funds rate is constrained by its effective lower bound." - This means that there is a chance that the fed funds rate could be cut to 0% again as it was between 2009 to 2015. This was crack cocaine for the asset markets so the traders (including Trump) would jump for joy to see that the Fed still holds this out as a potential policy. If the Fed cuts to ZIRP again they would stimulate by the wide variety of other "emergency facilities" they invented, including buying longer-term Treasury and mortgage bonds and even corporate debt.
"The Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances. The Committee is prepared to act forcefully to ensure that longer-term inflation expectations remain well anchored." This means that the Fed will not cut the fed funds rate (or any other monetary action) if they think inflation will rise -- even if a recession causes high unemployment. That was Paul Volcker's strategy. He broke the back of late 1970s inflation by raising the fed funds rate which caused the nasty 1980-82 recession with high unemployment that lasted for years. Paul Volcker is Jerome Powell's hero so he is making a firm commitment to controlling inflation.
https://fred.stlouisfed.org/series/FEDFUNDS"The Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability." The Fed in the past sometimes raised the fed funds rate when the economy "ran hot" with great employment that was higher than the Fed thought was sustainable. The Fed would then "take away the punch bowl when the party was just starting" by raising the fed funds rate proactively to prevent inflation. That could start a recession unnecessarily. The new Framework recognizes that employment may be full without a wage-price spiral starting. So they won't raise the fed funds rate proactively.
It remains to be seen how independent the Fed will be once Fed Chair Powell is replaced by a Trump stooge. The new Framework takes into account lessons learned over the past few years. Regardless, the Fed may pump money into the system under pressure from Trump.
The Fed's monetary moves (including paying interest to banks for their reserves, the fed funds rate, the huge purchases of government debt, etc.) mostly affect the banks and asset prices. The huge bubbles in the stock, bond and real estate markets have been caused by the Fed's activities. Investors generally love this because they become richer. But the housing bubble is a problem because house prices have become unaffordable to many.
https://fred.stlouisfed.org/series/WALCLhttps://fred.stlouisfed.org/series/CSUSHPINSAConsumer price inflation is mostly caused by fiscal stimulus, not monetary stimulus. When the demand for consumer goods and services grows faster than the supply prices rise. The enormous government deficits predicted for the future almost guarantee rising inflation because those deficits represent money going into consumer hands, whether because of tax cuts or increased spending. Tax cuts to the rich are less likely to be spent on consumer products but there is still plenty of stimulus going to the working and middle class.
It has always been frustrating to the Federal Reserve that they are held responsible for consumer price inflation when they have no control over Congress (fiscal stimulus).
Wendy
