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Fed May Reconsider Approach to Inflation and Jobs: Powell

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The U.S. Federal Reserve is considering revising key elements of its monetary policy framework, especially regarding jobs and inflation, as it faces the possibility of more frequent and persistent supply shocks. This comes in response to inflationary pressures and the possibility that such price increases may become more common in the years ahead, Fed chair Jerome Powell said Thursday.

Potential Impact of Supply Shocks on the Economy

“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,” Powell remarked during his opening speech at a two-day conference aimed at reassessing the Fed’s current monetary policy. The policy was adopted in 2020 as the economy was still recovering from the pandemic’s impact.

Review of Economic Environment Since 2020

The economic environment has changed significantly since 2020, and the Fed’s review will reflect those changes, Powell noted. Despite these shifts, Powell did not focus on current monetary policy or the economic outlook during his address. However, he did predict that the April personal consumption expenditures (PCE) inflation would fall to 2.2%, although this still likely doesn’t account for upcoming tariff-driven price increases.

Soft Landing Despite Inflation

Powell pointed out that the current inflationary results are “historically unusual,” with inflation falling from its pandemic peak without major economic damage. The U.S. economy appears to have achieved a “soft landing,” largely due to the Fed’s existing strategy. The current unemployment rate of 4.2% is slightly higher than the previous year but still close to what the Fed considers full employment.

Reevaluation of Inflation and Employment Policies

Powell’s comments suggest that the Fed may be moving towards a more proactive strategy to address future inflation shocks. This is particularly relevant as former officials and analysts have criticized the Fed’s slow response when inflation surged in 2021. Powell mentioned that the Fed would reconsider its stance on employment, given its previous strategy of not considering low unemployment as a signal of inflation risk.

Impact of Trump’s Tariffs and Globalization Trends

Part of the Fed’s caution around inflation stems from its ongoing assessment of President Trump’s tariff policies, which have complicated the Fed’s ability to gauge the economy’s strength and direction. Additionally, there is growing concern over how the pandemic has reshaped the global economy, particularly as companies shift towards more flexible supply chains in response to the developing tariff war.

Current Fed Strategy and Future Amendments

For now, the Fed has decided to remain on the sidelines, keeping interest rates within the 4.25% to 4.5% range until these issues are resolved. The Fed is also revisiting its broader approach to monetary policy, which includes the 2% inflation target and its commitment to achieving maximum employment.

Changing Views on Inflation Targeting

Five years ago, the Fed revised its approach to allow more room for lower unemployment rates and committed to using periods of high inflation to offset times of low inflation. Powell indicated that the current situation, with inflation running at elevated levels, calls for a reevaluation of this approach. Discussions have pointed toward revising the language on employment shortfalls and average inflation targeting to better adapt to changing economic conditions.

Future Revisions and Strategy Adjustments

Powell acknowledged that the idea of intentionally overshooting inflation targets has become irrelevant in the current context, especially after the near double-digit inflation during the pandemic reopening. The Fed expects to make amendments to its strategy in the coming months, potentially introducing a new framework during the Kansas City Fed’s annual August research conference in Wyoming.

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