Central bank chair flags economic volatility, says 2020 framework may need key revisions
Federal Reserve Chair Jerome Powell has warned that the United States may be entering a period marked by more frequent and potentially more persistent supply shocks — a shift that could force longer-term interest rates to remain elevated and prompt the Fed to rethink its monetary policy framework.
Speaking Thursday at the Thomas Laubach Research Conference in Washington, D.C., Powell said that while inflation expectations remain broadly anchored around the Fed’s 2% target, a return to the near-zero interest rate era of the 2010s is unlikely.
“Higher real rates may also reflect the possibility that inflation could be more volatile going forward than during the inter-crisis period of the 2010s,” Powell said. “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 remarks follow the Fed’s decision last week to hold its benchmark interest rate steady in the 4.25%–4.50% range. While the central bank cut rates by a full percentage point last year, it has since resisted further easing amid economic uncertainty — including tariff-related disruptions.
Although Powell did not explicitly mention former President Donald Trump’s latest tariffs, he has previously acknowledged that such measures could slow growth and fuel inflation. Recent data from supply chain firm Flexport showed a 60% drop in container bookings from China to the US, following a pre-tariff spike in imports. Trump has paused further tariff increases for 90 days while trade talks continue with leaders from China, the UK, and India.
Framework under review
Powell’s comments came as the Federal Reserve undertakes its first policy framework review since 2020. The original framework introduced a “flexible average inflation target,” allowing inflation to run slightly above 2% in pursuit of broader employment goals. However, this strategy quickly lost relevance as inflation surged in 2021 and 2022, forcing the Fed into aggressive rate hikes.
“In our discussions so far, participants have indicated that they thought it would be appropriate to reconsider the language around shortfalls [in inflation and employment goals],” Powell said.
He added that while the framework must evolve to address new challenges — such as global supply disruptions, climate events, and geopolitical instability — certain principles remain constant. Among them: the importance of anchoring long-term inflation expectations.
Communication challenges
Another key focus of the review is improving the Fed’s communication strategy, particularly during volatile or uncertain periods. Powell acknowledged that the Fed misjudged inflation in 2021, initially calling it “transitory,” and that market participants expect greater clarity in future policy shifts.
“In periods with larger, more frequent, or more disparate shocks, effective communication requires that we convey the uncertainty that surrounds our understanding of the economy and the outlook,” he said.
While Powell did not give a precise timeline for the release of the updated strategy, he suggested it would be completed “in the coming months.” The last framework was unveiled at the Jackson Hole symposium in August 2020 — a precedent that could be followed again this year.
