Powell: The Federal Reserve is considering adjusting its monetary policy framework and reexamining the definition of "full employment" and the path to achieving its inflation target.

Federal Reserve Chairman Jerome Powell said that policymakers are considering adjusting key parts of the framework that guides monetary policy decisions, including their views on the insufficient level of US employment and the way to achieve inflation targets. In a speech prepared for a conference on the Federal Reserve's monetary policy framework on Thursday, Powell said, "Officials have indicated that they believe it is appropriate to reconsider the wording around 'insufficient'. We had a similar view on the average inflation target framework in last week's meeting." Powell acknowledged that the current framework was designed during a period of low interest rates and low inflation. He said, "We will ensure that the new consensus statement can adapt to a wide range of economic environments and developments." Federal Reserve officials launched a regular review of the central bank's long-term strategy (i.e. framework) for implementing monetary policy and its communication tools this year. The framework guides Federal Open Market Committee (FOMC) officials in setting interest rates to help achieve the broad goals assigned by Congress of promoting price stability and maximum employment. The inflation target set by the Federal Reserve is 2%. After completing the last review in 2020, the Federal Reserve adopted the new framework aimed at achieving inflation "moderately above 2%" for "some time" after a period of inflation persistently below 2% - this approach is known as the flexible average inflation targeting. Critics later argued that the new framework was too focused on the low interest rate and low inflation environment at the time, and was no longer relevant after the outbreak of the COVID-19 pandemic. Powell said that a major consideration in 2020 was getting Americans' long-term inflation expectations close to 2%. He said, "Anchored expectations are critical to everything we do, and we remain fully committed to the 2% target today." However, he pointed out that the economic environment has changed significantly since 2020, and the current framework review will reflect policymakers' assessment of these changes. Powell said the idea that policymakers are constrained by the so-called zero lower bound on interest rates is "no longer the basic assumption". The zero lower bound refers to interest rates being at a low level, leaving officials with little room to lower borrowing costs to support the economy when needed. But he added, "Continuing to address this risk in the framework is prudent." Adjusting the definition of "insufficient" employment The 2020 framework review also adjusted the Federal Reserve's employment targets, focusing on the so-called "insufficient" - periods of high unemployment. Previously, the Federal Reserve treated high or low unemployment rates equally. This change effectively softened a practice of the Federal Reserve of preemptively raising rates to cool the labor market and prevent inflation pressures from emerging before they materialize. On Thursday, Powell said that this adjustment does not commit to permanently abandoning preemptive policy measures or ignoring labor market tightness (job vacancies far exceeding available labor). He said, "This indicates that mere tightness in the labor market alone is not enough to trigger a policy response, unless the committee believes that allowing it to develop will lead to unwelcome inflation pressures." Some Federal Reserve observers have pointed out that this change is why the central bank failed to raise rates in a timely manner to address post-pandemic inflation, believing that officials focused too much on employment targets. By the time the Federal Reserve began significantly raising rates in early 2022, inflation had reached near its highest level in forty years. Powell countered the argument that the policy framework led to a delayed response. Instead, he pointed out that officials at the time judged (later proven wrong) that the inflation caused by the pandemic was temporary. Powell has stated that the Federal Reserve intends to complete the current framework review by the end of the summer of this year.