Fed unanimously adopts new policy framework of flexible inflation targeting, eliminates ‘makeup’ strategy for inflation
In Jackson Hole speech, says framework calls for balanced approach when central bank’s goals in tension
Prior framework’s emphasis on overly specific set of economic conditions may have led to some confusion
Framework removes language indicating zero-lower-bound is a defining feature of economy
New framework designed to work in a range of economic conditions
Idea of intentionally moderate inflation overshoot proved irrelevant
New framework emphasizes commitment to act forcefully to ensure longer-term inflation expectations remain well-anchored
Fed still believes it may not need to tighten policy solely based on uncertain estimates that employment may be beyond its maximum sustainable level
Shortfall language in previous statement posed communications challenge, and is removed in new framework
Preemptive action likely would be warranted should tight labor market pose risk to price stability
Fed’s goals are in tension, must balance both sides of Fed’s mandate
Stability of unemployment rate allows Fed to ‘proceed carefully’ as we consider changes to policy stance
Risks to inflation tilted to upside, risks to employment to the downside
In Jackson Hole speech says shifting balance of risks may warrant adjusting policy stance
Downside risks to labor market rising
GDP growth has slowed notably, reflecting slowdown in consumer spending
Latest data indicates 12-month PCE inflation rose 2.6% in July; core rose 2.9%
Effects of tariffs on consumer prices now clearly visible, expect effects to accumulate in coming months
Reasonable base case is inflation effects of tariffs will be short-lived
Possible that tariff-driven upward pressure on prices could spur lasting inflation dynamic, but unlikely, given downside risks to labor market
Cannot allow one-time increase in price level to be ongoing inflation problem
Tighter immigration has led to abrupt slowdown in labor force growth.
Slowdown in job growth has not opened up a large margin of labor market slack, which we want to avoid.
Labor supply has softened a line with demand, breakeven job growth is down sharply.
Labor market in “curious kind of” balance.
Stability of unemployment rate allows Fed to proceed carefully as we consider changes to policy stance.
Risk to inflation tilted to the upside, risk to employment to the downside.
Fed’s goals are in tension, must balance both sides of Fed’s mandate.
Downside risk to labor market rising.
GDP growth has slowed notably reflecting slowdown in consumer spending.
Latest data indicates 12 month PCE inflation rose 2.6 in July core rose 2.9%.
Effects of tariffs on consumer prices now clearly visible, expect effects to accumulate in coming months.
Reasonable base case is inflation effects on tariffs will be short-lived.
The market is now pricing a 90% chance of a September cut and 2 cuts by the end of the year.