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Federal Reserve chair Jerome Powell made news in two important ways in his valedictory keynote speech as the central bank’s leader. First, he opened the door wider to a possible interest-rate cut in September. Second, he released the Fed’s revised framework, or “consensus statement,” describing its approach to setting interest rates.
His August 22 remarks at the Fed’s annual symposium near Jackson Hole, WY, also served as an important milepost in framing his legacy as Fed chair, nine months before he is scheduled to vacate the position. One part will be his rock-solid commitment to keeping the Fed one step removed from the day-to-day political fray. There can be no doubt that if Fed policymakers trim rates in September, they will do so because they judge economic conditions as warranting a cut, not because the president is demanding one.
Another part of Powell’s legacy will be these periodic reviews of the consensus statement. The revisions announced on August 22 are not beyond debate, but they are subtle and anticipate all the most obvious objections. The revised statement will leave the Fed’s rate-setting Federal Open Market Committee (FOMC) well positioned to conduct monetary policy for the next five years.
Near-term monetary policy moves: Opening the door wider
Powell signaled more definitively than expected that the FOMC could lower its benchmark federal-funds rate by 25 basis points at its next meeting, September 16-17. This was surprising for two reasons. First, the macroeconomic situation remains complicated, with two key forces tugging the Fed in opposite directions.
On the one hand, the labor market is clearly softening. Job growth has slowed sharply according to the Labor Department’s latest estimates, and households have become increasingly guarded in their responses to the think tank Conference Board’s monthly survey question about whether jobs are easy or hard to get.
On the other hand, inflation continues to run too hot for the Fed’s liking. It has exceeded the Fed’s 2 percent target since February 2021 and is expected to do so through 2027, according to the Bloomberg consensus forecast, fueled partly by the continued passthrough of tariffs into consumer prices. If that forecast comes true, inflation will have run above target for seven years—too long for any self-respecting central bank.
Taken alone, the softening labor market would indicate that a rate cut is advisable, but inflation remaining above target tugs in the other direction. Given the persistence of the miss on the inflation target, it’s surprising Powell and his colleagues feel comfortable giving such a clear nod toward even a slight easing in their policy stance.
Powell’s rate cut signal was also surprising since a lot of important economic information will be released before the Fed’s next meeting. The Labor Department will post another employment report on September 5 and they will publish another inflation reading on September 11. Between those two reports, there is plenty of potential for the macroeconomic picture to change substantially—for better or for worse.
To be sure, Powell stopped well short of committing to a rate cut. But still, it was a clearer “steer” than he usually gives almost a month before a meeting. This indication is especially notable because it comes, of course, amid President Donald Trump’s intense pressure campaign on the Fed to cut its policy rate by much more than 25 basis points.
On that front, Powell was 100 percent clear that political pressure will play no role in the FOMC’s decisions. He said its members will set rates “based solely on their assessment of the data and its implications for the economic outlook and the balance of risks. We will never deviate from that approach.” Put more bluntly, they will never bow to political pressure—so long as he has anything to do with it.
Shortly after Powell finished his Jackson Hole remarks, Trump escalated his attack on the central bank by threatening to fire Federal Reserve Board governor Lisa Cook if she did not resign. On August 25, he said in a letter posted on social media that he had removed Cook from her Fed position, citing unproven allegations that she submitted fraudulent information on mortgage applications. Cook said in a statement that Trump lacked cause to fire her and she would not resign.
Cook’s term is scheduled to run until 2038. If Trump is successful in removing her, he will have an opportunity to replace her with someone enthusiastic about cutting rates more aggressively. This is an important sub-plot in the overall struggle between the White House and the Fed over who will control monetary policy. How this conflict will be resolved is still very much open.
The five-year framework review: Less new than meets the eye
Powell also made news on August 22 by releasing the Fed’s revised “Statement on Longer-Run Goals and Monetary Policy Strategy,” or the “consensus statement.” Since 2012, the FOMC has used the statement to describe the major considerations it will bring to bear in conducting monetary policy.
When Fed policymakers revised the statement last in 2020, they made several changes meant to help them better cope with what appeared to be a permanent environment of low inflation and low interest rates. Those changes quickly came to appear ill-timed. Inflation surged during the pandemic, and the Fed raised rates aggressively, far above the near-zero level where they had been for much of the preceding decade.
In the revision released August 22, the committee members seemed to walk back most of the changes they had introduced five years before. Many analysts have interpreted these new changes as a big “never mind” by the Fed. But closer inspection suggests these revisions were less about reversing the 2020 changes and more about making some smart recalibrations. Here are the three most important changes in the new document, the third of which I think is problematic.
First, the committee members removed the statement that “the maximum level of employment is a broad-based and inclusive goal.” At first blush, that could easily be interpreted as the FOMC stepping back from committing to bring the benefits of a strong economy to as many people as possible. But that’s probably not the right interpretation.
They replaced the “broad-based and inclusive” language with the following: “Durably achieving maximum employment fosters broad-based economic opportunities and benefits for all Americans.” An alternative interpretation is that they wanted to get rid of a word that has become politically loaded—“inclusive”—and replace it with a more functional definition of what they aim to achieve. Little harm done here, if any.
Second, they dropped the language about how they would follow an asymmetric strategy if inflation ran persistently below their 2 percent target and returned it to describing a symmetric, traditional form of inflation targeting. Some Fed watchers have wondered whether this is a turn toward a more hawkish method of conducting policy.
I don’t see it that way. The asymmetric response to persistently low inflation was meant to help guard against a downward spiral, in which persistently low actual inflation would foster a decline in inflation expectations, and low expectations in turn would weigh further on actual inflation. Powell correctly pointed out in his speech that this policy approach didn’t apply during the pandemic period: “As it turned out, the idea of an intentional, moderate inflation overshoot had proved irrelevant. There was nothing intentional or moderate about the inflation that arrived a few months after we announced our 2020 changes to the consensus statement, as I acknowledged publicly in 2021.”
In retrospect, the asymmetric approach was ill-designed from the beginning. If the goal was to ensure that longer-term inflation expectations remained anchored, fine-tuning the future course of actual inflation was an indirect method, at best.
In the latest iteration of the consensus statement, the committee replaced the asymmetric approach with a clear statement of a direct approach to controlling inflation expectations: “The Committee is prepared to act forcefully to ensure that longer-term inflation expectations remain well anchored.” This shift to focusing directly on one of the key determinants of future inflation is a positive development, and it doesn’t indicate either a hawkish or dovish turn in policy.
The third change has to do with how the FOMC members interpret their employment objective. Until five years ago, they said they aimed to counteract “deviations” of employment from its maximum sustainable level. In the 2020 iteration of the consensus statement, they replaced “deviations” with “shortfalls,” which was a brilliantly concise way of clarifying that they had no objection to employment being too high so long as inflation appeared to be under control.
On August 22, they reversed course. They eliminated all three mentions of “shortfalls” from the consensus statement and emphasized instead that they mean to aim for “maximum employment.” This adjustment strikes me as a mistake because it invites the same critique that applied to the original 2012 version of the statement—namely that they might indeed object to “too many people having jobs” even if inflation gives no indication of moving away from target.
But I must admit that the committee softened the blow here by adding a new sentence that recognizes the circumstance that gives me pause: “The Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability.” That addition takes away most—but not all—of the sting. However, if the previous formulation wasn’t broken, why fix it?
An important part of Powell’s legacy
Powell inherited a Fed in strong condition and has guided it expertly through extremely difficult conditions. His Jackson Hole speech points to two key aspects of his legacy as Fed chair. One is his commitment to keeping politics out of Fed policymaking. The second is the Fed’s commitment to regularly reviewing and being open to revising its approach to policymaking.
One can only wonder who will deliver the keynote address at the Jackson Hole symposium in 2026, and who will guide the FOMC through the next reconsideration of the consensus statement in 2030. The hope must be that in each case he or she will be someone who exercises as much wisdom and grit as Powell has so graciously displayed.
Data Disclosure
This publication does not include a replication package.
