Fed Shifts to Traditional Inflation Targeting Post-Pandemic Pressures

Federal Reserve Chair Jerome Powell signaled a return to a more traditional inflation targeting framework during his remarks at the Jackson Hole Economic Symposium on August 22, 2025. This marks a significant shift from the 2020 policy approach, which allowed inflation to average 2% over time. The updated Statement on Longer-Run Goals and Monetary Policy Strategy reaffirms the Fed’s commitment to maximum employment and stable prices, with a firm 2% inflation target measured by the personal consumption expenditures price index [3]. The previous "makeup" policy, which permitted inflation to run above 2% to compensate for past below-target readings, has been abandoned.

The new framework also removes language that previously emphasized employment shortfalls, which had focused on boosting jobs at the expense of inflation risks. Instead, it adopts a more balanced stance, defining maximum employment as the highest level consistent with price stability [1]. Powell explained that the 2020 strategy was designed for a low-rate, low-inflation environment following the Global Financial Crisis, but the post-pandemic surge in inflation rendered it inadequate. The revised framework aims to simplify communication, enhance flexibility, and align with the current higher-rate environment where inflation risks are more evenly balanced [3].

Powell emphasized that the Fed still retains tools such as quantitative easing should interest rates approach the zero bound. However, the central bank has removed the specific focus on the effective lower bound as a core constraint. In cases where employment and inflation objectives conflict, the Fed will adopt a balanced approach, considering both the magnitude of the gap and the speed at which each can be addressed [1].

The Fed chair also hinted that interest rate cuts could begin in September 2025, contingent on continued cooling of inflation and signs of a slowing labor market. Powell did not explicitly signal a September cut but indicated a data-dependent stance. He stressed the importance of sustained evidence of inflation trending toward 2% and a stable labor market before any policy shift [4]. The market reacted with mixed signals, with equities rising on expectations of easing, yet analysts remain divided on the likelihood of an immediate cut.

Analysts have noted the delicate balancing act the Fed faces. Jonathan Millar of Barclays highlighted the need for the Fed to manage expectations while maintaining its dual mandate of price stability and employment [5]. The upcoming August inflation and employment data will be pivotal in determining the Fed’s next move. Powell reiterated that decisions will be based on these metrics, reinforcing the central bank’s commitment to a measured and evidence-based approach.

The shift toward flexible inflation targeting suggests that interest rates may remain elevated for an extended period compared to past cycles, depending on how inflation and employment evolve. This framework underscores the Fed’s renewed emphasis on price stability while adapting to the complexities of the current economic environment. As the U.S. economy continues to adjust to shifting labor dynamics and lingering inflationary pressures, the Fed’s policy direction will remain under close scrutiny from markets and policymakers.

Sources:

[1] https://www.reuters.com/business/finance/feds-powell-says-monetary-policy-framework-back-more-traditional-footing-2025-08-22/

[2] https://www.cnn.com/business/live-news/fed-powell-jackson-hole

[3] https://www.federalreserve.gov/newsevents/speech/powell20250822a.htm

[4] https://paradigmfutures.net/a/general/powell-jackson-hole-2025-market-reaction/

[5] https://www.usatoday.com/story/money/2025/08/21/powell-fed-jackson-hole-rates/85718105007/