Federal Reserve Chair Jerome Powell announced an updated operating framework on Friday, shifting the central bank’s focus towards traditional efforts of promoting price stability. The new framework removes language about low interest rates and returns to a flexible inflation targeting approach.
Powell emphasized continuity with past statements, saying there is “a great deal of continuity” with previous policies. However, the revised statement aims to anchor long-term inflation expectations, moving away from a policy path that prioritized high unemployment over inflation targets.
The updated framework replaces the 2020 policy framework review, which had led to aggressive Fed rate hikes in response to post-pandemic inflation pressures. The new approach balances risks to both employment and inflation mandates when setting monetary policy, with Powell stating that setting numerical goals for employment is “unwise.”
Economists expect the central bank to adopt a more hawkish stance under the new framework, with some predicting higher interest rates in the near term. Nationwide chief economist Kathy Bostjancic noted the pre-pandemic framework’s focus on both inflation and employment goals, while RSM US LLP chief economist Joe Brusuelas predicted the new approach would lead to higher interest rates.
The review of the Fed’s operating principles was widely expected, with minutes from the July 29-30 policy meeting highlighting the overhaul’s design to be robust across a wide range of economic conditions. The updated framework takes into account the extent of departures from goals and potentially different time horizons for return to target levels.
Source: https://www.reuters.com/business/finance/feds-powell-says-monetary-policy-framework-back-more-traditional-footing-2025-08-22