Fed to “proceed carefully” with changes to policy stance amid heavy concerns about rising inflation.
By Wolf Richter for WOLF STREET.
Powell’s speech today at the Jackson Hole conference had two major components: Short-term monetary policy and for the long term, the Fed’s new monetary policy framework.
Monetary policy: “shifting balance of risks may warrant adjusting our policy stance,” but “carefully.”
Powell made room for a rate cut in September, as “the balance of risks appears to be shifting” to concerns about the labor market.
But it was tempered with lots of concerns about inflation, including his projection that the 12-month core PCE price index for July, to be released in a week, would accelerate further to 2.9%.
Cutting rates as inflation is accelerating is a delicate affair that could spook the bond market and drive up long-term rates – which is precisely what happened in 2024 when the Fed cut by 100 basis points and long-term yields rose by over 100 basis points.
So Powell laid out a scenario of “carefully” nudging down the policy rate, rather than an aggressive series of rate cuts. He said:
“In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.
“Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance.
“Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
This “may warrant adjusting our policy stance” was all the market wanted to hear. The text of the speech was released before Powell read it at the conference, and the trading algos reacted to the text instantly, and even before Powell started speaking, stocks jumped and the 10-year yield dropped.
He acknowledged the difficulties for the Fed posed by the mix of weakening labor-market growth and rising inflation.
Part of the labor market equation is the lower supply of labor due to immigration policies. So, “it does not appear that the slowdown in job growth has opened up a large margin of slack in the labor market,” Powell said. This slack in the labor market would show up in higher unemployment rates, for example, but the unemployment rate has remained “historically low” (between 4.0% and 4.2% since May 2024).
He said:
“Labor supply has softened in line with demand, sharply lowering the ‘breakeven’ rate of job creation needed to hold the unemployment rate constant.”
“It is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
But then there was some heavy breathing about inflation:
“It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed.”
“One possibility is that workers, who see their real incomes decline because of higher prices, demand and get higher wages from employers, setting off adverse wage–price dynamics. Given that the labor market is not particularly tight and faces increasing downside risks, that outcome does not seem likely.”
“Another possibility is that inflation expectations could move up, dragging actual inflation with them. Inflation has been above our target for more than four years and remains a prominent concern for households and businesses.”
“Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem.”
Monetary Policy Framework: “average inflation” targeting is dead.
Over the past months, the Fed conducted an internal review of its monetary policy “framework,” as it vowed to do every five years. This framework is a set of guidelines for the FOMC’s monetary policy decisions. Today, Powell introduced the resulting new “2025 Statement on Longer-Run Goals and Monetary Policy Strategy” that was passed unanimously by the FOMC.
The most important change in the new framework is the elimination of “average inflation” targeting, an odious strategy created in the framework of August 2020, which specified that the Fed would allow inflation to “run moderately above its 2% target” to make up for periods when it ran below the 2% target, to achieve an inflation rate that “averages 2% over time.”
The result of that “average inflation” targeting guideline of August 2020 was the inflation shock.
Inflation began raging at the beginning of 2021, but the Fed continued its near-0% policy and massive QE into early 2022. The Fed didn’t react to raging inflation for 15 months. I called it “the most reckless Fed ever” (google it).
By the time the Fed hiked for the first time in March 2022, bringing its policy rates to 0.25%-0.5%, CPI inflation was already at 8.5%. This was responsible, among other things, for the explosion of home prices (roughly 50% in less than three years), as the Fed’s massive QE, including the purchase of trillions of dollars of MBS, pushed down mortgage rates below 3%, while CPI inflation eventually exceeded 9%. This was the best free money ever. And when money is free, prices no longer matter.
This refusal for 15 months to end these crazed monetary policies of massive QE and near-0% policy rates in face of raging inflation was at least in part brought about by the Fed’s newfangled “average inflation” targeting guideline established in 2020.
In today’s framework, the Fed killed this odious concept of “average inflation” targeting and returned the framework to the previous method of inflation targeting.
Powell said:
“Our revised statement emphasizes our commitment to act forcefully to ensure that longer-term inflation expectations remain well anchored, to the benefit of both sides of our dual mandate.
“It also notes that ‘price stability is essential for a sound and stable economy and supports the well-being of all Americans.’ This theme came through loud and clear at our Fed Listens events. The past five years have been a painful reminder of the hardship that high inflation imposes, especially on those least able to meet the higher costs of necessities.”
Lesson learned.
The 2% target itself remained etched in stone and wasn’t even on the table for the discussions of the new framework, as Powell had said all year during his numerous post-meeting press conferences.
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I think Powell was mainly concerned about the labor market in the vicinity of his chair.
“One possibility is that workers, [AND RETIREES] who see their real incomes decline because of higher prices,” … are forced into/ back into the workforce AND themselves all pitch in to spur the next (RE: current/ ongoing) wave of inflation…
That CONTINUES 50% above target.
With a declared “tight” above neutral rate?
I’m relieved anyway: we haven’t seen the cadre of ATH asset prices in… days!
Guess I’ll put the ole college fund into shmitcoins and exchange them for USDs after they lose another 90% purchasing power over the next decade.
They sure do love the TINA environment!
Poor Pow Pow, must be getting harder and harder to speak from both sides of the orifice especially when you someone constantly publicy bashing you with a giant hatchet..
This delicate balancing act is not easy to pull off even in the best and most supportive environment from others in charge but in times like now, makes you wonder why someone worth hundreds of millions would want to continue to do the job, unless Pow Pow thinks he is going to be the one day remember fondly in the history book, in which case at least to him that legacy is worth more than money and a comfortable retirement..
Most of the elite still think he did a great job. Then again, they’re biased because of their massive asset-holdings. I hear these people say all the time that the inflation was a small price to pay for the quick recovery from the pandemic shutdowns.
Pretty sure I heard (by a commenter here) that Powell’s net worth was around $45M. Google search says that’s not a bad estimate.
I have neighbors who’ve managed that without the connections. As that other commenter said, that almost seems like evidence he’s NOT corrupt.
Wolf two questions:
1) during the most recent FOMC meeting the decision was made to hold the federal funds rate constant. Within a couple days, in what seemed like a script made for TV, we received startling information on the state of the labor market, which very much flipped the conventional wisdom, that had until then pointed to the strong labor market as “proof” that there’s no economic slowdown on the way. My question that is this: is it possible that Powell & the FOMC had no advance warning that such drastic adjustments to labor market data were imminent? It seems hard to believe that Powell & Co. would step out on a limb like that, without noticing somebody (at the BLS) behind him, with a chainsaw.
2) if push comes to shove, and the Fed really does need to prioritize either labor and employment or inflation, my intuition is that inflation will capture their attention every time.
After all, labor market weakness inflicts pain on a “few” while inflation brings misery to all. With that said, what side of this very difficult bet would you expect Powell to take?
“is it possible that Powell & the FOMC had no advance warning that such drastic adjustments to labor market data were imminent?”
Not only possible, but certain. The BLS finished the data on the evening of July 31, before publication in the morning of August 1. Trump received this data (the revisions, etc.) on that evening on July 31 before the publication. The White House always get this data on the evening before public release. This we know from what the White House has said. The evening of July 31 is the earliest ANYONE could have gotten then info.
The FOMC meeting ended on July 30, so it certainly didn’t have this info. Trump got the BLS data on the evening of July 31.
This has happened many times before, that sharp revisions days after the FOMC meeting blow up the Fed’s thinking. It happened the other way around after the 50-basis point cut in September, and three weeks later, the spooky labor market data that had caused the monster cut was revised away. Powell has talked about those issues — about making decisions on uncertain data.
“The evening of July 31 is the earliest ANYONE could have gotten then info.”
Unless China has a mole or two at the BLS like they did at the FED for years! You have great faith in the morals of the bureaucrats that always seem to escape jail and end up working on Wall St.
Ms. Cook has been caught red handed committing mortgage fraud.
Thanks Wolf.
I was also curious to know which risk you think Powell will weigh more heavily, next month: inflation or labor market weakness.
My sense – and your superb reporting on the subject has helped to shape it – is that fighting inflation will win the day.
As you’ve recently explained, services inflation was never tamed (in fact, it’s now back on the rise) post-covid. Add to this the risk of at least some residual consumer price impacts, as new tariffs impose a rapid reordering of international trade, with supply chain impacts that are very difficult to predict.
Given all this, I struggle to see the rationale for favoring the “employment” half of the so-called dual mandate.
I think Powell will (should) hold firm in September – in fact, the FOMC could conceivably even raise the FFR, should next week’s PCE data, and the August CPI reports, suggest winter is coming.
Your thoughts?
Before the next meeting there will be:
1. PCE inflation index for July (next week), and Powell today said that it would be worse than the last one, based on data from CPI and PPI.
2. CPI for August. And who knows how that will turn out.
3. Jobs report for August and JOLTS for July.
If the CPI report is ugly and the jobs report is rosy (which no one will believe), there might be a hawkish cut of 25 basis points, meaning a cut and lots of talk about keeping things were there are going forward until there is more clarity.
If CPI is tame and jobs weak, there might be a dovish cut of 25 basis points, and more cuts on the horizon, with a couple of dissenters arguing for a 50-basis point cut.
If there is a lot of sudden ugliness in the labor market until then, there might be a 50-basis-point cut.
A consistent strong surge of inflation going into 2026 could put rate hikes back on the table next year. But it would have to be strong and consistent. I don’t know how likely that is.
Trump is going to remake the Fed by hook or crook, but if inflation resurges, Trump is going to have a huge problem on his hands and will likely blame the Fed and let the Fed do its job to get inflation back down.
To be honest, I’m surprised they have held out this long. They have been under relentless attack. Kugler already quit to escape the attacks. It’s just brutal being in a job where the President hounds you personally in public every day, and uses the powers of the federal government to go after you personally if you don’t do what he wants you to do. The last eight months were hell for these people. Powell kept his cool though, and I admire that. I’m way too much of a loose cannon to swallow this kind of stuff silently every day.
A perfect storm is brewing that will hit with full force by next spring or early summer. Rate cuts will forcefully add some 100 mph inflation winds to the tariff tax pass-through to consumers, and the immigration crackdown precipitated worker shortages. All of this just in time to piss off voters enmasse heading into the midterm election. Timing’s everything!
Inflation will be the key because of reasons you state inflation really hits the btm 80 percent
Spiking the punch bowl! Stocks reach an all time high! Baby, let’s party like it’s 1929 again!
Green line g9es up from speech given from a government appointed official. Freesest market ever!
Well of course stocks are going to go up.
I sold a ton back in December after they said they were going to holddddddd… and then April happened.
The question now is how long can this boost last with whatever monster lurking in the shadows. which is the whole reason why they are cutting.
“…to wreck less, or to be reckless, that is the question…” (…with great apologies to the Bard…).
may we all find a better day.
They killed “average inflation targeting” because to maintain an average of 2% would require going below 2% now. So basically it’s an admission that the entire thing was a fraud.
No. It was always a one-way average from get go. There was nothing in the 2020 framework about letting in inflation go below 2%. Inflation had been below target for about 10 years, and average inflation targeting was supposed to have made up with higher inflation for the 10 years of below 2% inflation.
Well there are statements all over their website and in their releases claiming that the purpose of FAIT was that they were seeking to achieve an average inflation rate of 2% over time. So was that true? Is or was that their intention? Because I’m not a mathematician or anything but I don’t think you can have a 2% floor and a 2% average at the same time unless you get really lucky.
You’re twisting the 2020 document around to fit your narrative.
According to history books on the fed the target has been moving between 1-3% since their founding.
Why did the FOMC cut by 100 basis points in the fall of 2024 and now make this statement? They would have been way head of the curve by now if they had been methodically cutting by 25 basis points at a time.
“Another possibility is that inflation expectations could move up, dragging actual inflation with them. Inflation has been above our target for more than four years and remains a prominent concern for households and businesses.”
My opinion, attempted election interference.
–Geezer
Powell is trying to save his legacy and undo the damage Trump has cast upon his name.
According to the WSJ, “….the Fed said it would allow inflation to run modestly above its 2% target for periods to make up for times when it had fallen short.”
NOTICE, that door doesnt swing the other way……
Why cant rates be higher longer even though inflation is down to 2% so as to “…make up for times…” when rates werent high enough?
Why is there never a mention of the 2% target trend line, which currently is about 16 pts below where prices are currently? By the Fed’s own metrics of 2% acceptability, we are at UNACCEPTABLE price levels.
“According to the WSJ, “….the Fed said it would allow inflation to run modestly above its 2% target for periods to make up for times when it had fallen short.””
That’s what the new framework killed. The quote you posted describes the 2020 framework.
“Powell is trying to save his legacy and undo the damage Trump has cast upon his name.”
What legacy would that be? He darn near single handedly created the biggest housing bubble in US history!
Powell’s legacy is to be the guy who dumped 2 trillion dollars into a housing market sitting at about double its long run inflation adjusted average and refused to turn off the spigots even as real interest rates approached negative 6 or 7 percent. He is an incompetent and a fraud and the history books won’t be kind to him no matter what he does now.
I agree and hope you are right.
He’s definitely talking out of both ends. If it was me and, like him, I see a hike in prices, although just one time hit but I see the unemployment number will remain low, I don’t hike. I die on the unemployment number staying low (by his reasoning) and the knowledge that the next Fed or sooner, Trump is dropping the rate to 1%.
The bullying worked. Bad precedent. Bottom line in spite of Powell’s comments — Unemployment is historically rock bottom, and inflation is accelerating rapidly. Hopefully, the ensuing stock market mania and loosening of financial conditions over the next 20 days will force the FOMC to come to their senses.
Nope. The BS bullying did not ‘work’ at all and the FOMC will keep policy interest rates unchanged if it sees continued inflation which is exactly what Jerome Powell clearly stated again today.
Jerome Powell quote by Mr. Wolf: “policy rate is now 100 basis points closer to neutral than it was a year ago.” For the mathematics inclined, Powell did not give a direction higher or lower on the number line; i.e., this quote is the mathematical “absolute value,” the mathematic symbol being two vertical lines. Therefore, no correct information was actually provided.
“Neutral” is a theoretical concept, no one knows where “neutral” is, there is no absolute value of “neutral,” and people have different opinions and formulas as to where neutral may be. Powell also said that neutral is now likely higher than it was before the pandemic.
Seems very plausible there is just no way to balance inflation and employment but that is the box they have created. Fundamental paradigm shifts need to happen, imo, especially in the area of profit driven necessary services. Not really possible however in a very individualist society. Seems very plausible they will lower interest rates, it won’t help anything more than stock markets and lower short term treasury rates. Not clear it would boost employment given the continuous goal to reduce labor costs, but certainly no guarantee it would boost economic growth or at least in a way that benefits most.
The fed only has so much power. What we could do instead is not have inflationary government policy (legal immigration reform to bring in young works to help out our increasingly worrisome dependency ratio, getting ahead of social security shortfalls early, getting the deficit in check through increased revenue [asset prices tell me we’ve got a group of citizens with plenty of potential revenue that don’t even know what to do with the money they are swimming in]).
Pretty much everything I mentioned is political suicide in the US.
So we’ll just do it inefficiently though increasingly higher borrowing rates until the Government is forced to cut spending and raise revenue.
No one in his right mind should believe the BLS jobs numbers. I don’t mind reasonable revisions, but the last revisions were freaking ridiculous. Sure there are other measures of the labor force, like JOLTS, but the BLS numbers were the gold standard. They are now the sh_t standard. I wonder how Powell can get any reliable idea on what is happening with the labor force.
Remember when the Fed last dropped 50 bp in one meeting? They $#%& in their pants when they saw a jobs numbers report, which turned out to be wrong. We will probably see this again.
On the other hand, the inflation numbers seem fairly reliable and show a consistent uptrend in inflation.
So the Fed should go ahead and cut one, or two or three times. I look forward to 3 month treasury yields back to over 5% next year. But then I would have to start worrying about IRMAA again. What’s IRMAA? Don’t ask.
The FOMC may decide to increase their policy rates as unemployment stays low and constant and inflation rises significantly ahead.
Misery loves company(IRMAA). I avoided 2026 IRMAA managing 2024 interest income buying T-bills that matured in 2025. I figured interest income would drop in 2025 due to lower rates. In 2026 RMD’s start for me. Hoping that Social Security will become tax free by 2026. Who knows however, if IRMAA would continue to be calculated on the taxable portion of Social Security.
The Fed views asset inflation as good. See Greenspan’s “wealth effect”. Wage inflation is viewed as dangerous by the Fed however and will not be accepted for long.
Amazing times to live thru!
And I see my 🥛 did not spoil.
I question if cutting the Fed fund rate will do anything other than help in the short-term, despite the high rates there’s been record spending in AI where every CEO is salivating at the thought of laying off their entire workforce, a housing bubble too stubborn to pop, and just a very resilient economy. I think it is being tested too much with the federal workforce downsizing, the trickle of tech layoffs as the AI hype dies down (or even the layoffs caused by AI), the tariffs, and the immigration crackdown. Mortgage rates don’t care about what the Fed has to say, and the federal debt continues to skyrocket. It’s definitely a much more grim outlook than what we had exactly last year, but somehow the economy has stayed strong. I still have serious doubts about how this year will end, will the S&P somehow finish 15-20% three years in a row? Or will the music finally stop?
Currently on Kalshi, the odds are 77% for a September rate cut and only 20% for maintain. I’m tempted to put some money on maintain. It could be a good payout. But I have pretty much been wrong about everything the last ten years. And who can trust central bankers to do the right thing. Would sure be funny if Powell gave Trump the finger and hiked!