A long-standing Federal Reserve framework for conducting monetary policy has recently been shaken, prompting a reassessment of how the central bank will proceed with its operations. The last major revision to this framework occurred in the summer of 2020, during a pandemic economy characterized by “a quite difficult macroeconomic context of low interest rates, low inflation, relatively low productivity, slow growth and those kinds of things,” as Chair Jerome Powell explained at the time.
In a speech last week, Powell reflected on the decade leading up to this period, noting that the country had experienced “low interest rates, low growth, low inflation, and a very flat Phillips curve.” The latter refers to the observation that reducing inflation did not require a sharp rise in unemployment. This environment shaped the Fed’s strategic approach to setting interest rates.
Powell emphasized that the Fed is now closely examining the changes made in 2020, considering discrete but important updates based on lessons learned about the economy and how the public perceived those changes. This review likely includes the Fed’s delayed response to rising inflation. He acknowledged that inflation might become more volatile in the future, stating, “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.”
The 2020 framework revision placed greater emphasis on the maximum sustainable employment aspect of the Fed’s dual mandate. Powell reiterated the importance of labor markets during the annual Jackson Hole conference in August 2024, expressing growing confidence that inflation was on a sustainable path back to two percent. He also noted that unemployment was increasing due to “a substantial increase in the supply of workers and a slowdown from the previously frantic pace of hiring.”
By the end of April 2025, Powell told the Economic Club of Chicago that the Fed was adopting a “wait-and-see” approach, carefully monitoring whether recent tariffs-the steepest in a century-would have a lasting impact on inflation and employment before making any decisions about interest rate changes. Cleveland Fed President Beth Hammack told Reuters that moving forward, the central bank needed to remain “flexible enough so that any (Fed policy-setting) committee can do what it needs to do.”
During his speech last Thursday, Powell acknowledged that “the time has come for policy to adjust,” adding that “the direction of travel is clear and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” Yet, as the unfolding economic challenges suggest, one of those risks lies precisely in the difficult task of balancing these competing factors.
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