Fed’s expansive experiment in strategy to get a reboot at Jackson Hole

The U.S. Federal Reserve’s pivot toward the labor market in 2020 will get a reboot on Friday when Fed Chair Jerome Powell is expected to release a new framework for the central bank that accounts for a half-decade in which inflation surged, jobs were plentiful, and uncertainty became the watchword.

The new document may not completely discard the language rolled out when the Fed, in the midst of the pandemic and a burgeoning social justice movement, pledged not to short-circuit labor market gains on the mere threat of inflation in hopes of achieving “broad-based and inclusive” levels of employment.

But Powell has flagged that a recalibration is coming, potentially emphasizing stable inflation as a foundation for the best labor market results, and relegating some ideas to times when the economy is abnormally weak or inflation is abnormally low, as occurred in the decade before the pandemic.

In those years, as the Fed organized a nationwide series of community listening tours, staffers would ask about inflation and “people would look at us like we had two heads. It was not the topic” when employment and growth concerns were more paramount, said Duke University professor Ellen Meade, who helped organize the 2020 framework review as a top Fed adviser. “The world looks very different today.”

Powell has already acknowledged that the language adopted in 2020 had been overtaken by the surge of inflation during the COVID-19 pandemic and was likely on its way out. He is expected to detail the new strategy document when he addresses an annual Fed research conference on Friday.

Minutes of the Fed’s July 29-30 meeting released on Wednesday said the committee was close to finalizing changes to its statement of principles and reiterated that it “would be designed to be robust across a wide range of economic conditions.”

The current approach has been criticized for introducing complexities that may have slowed the Fed’s response to emerging inflation in 2021 and proved irrelevant to how the economy evolved during the pandemic.

Much of what was introduced in 2020, especially a controversial promise to allow periods of high inflation to offset low ones so it averages 2% over time, grew out of the Fed’s experience trying to lift interest rates from near-zero where they had been mired after the 2007-to-2009 recession.

That approach may remain appropriate during prolonged economic weakness, said former Fed Vice Chair Richard Clarida, who helped oversee the last framework revisions. But the approach for normal times may revert to the more straightforward inflation-targeting the Fed previously used.

“A verbatim reading of the 2020 statement holds up pretty well operating in the environment the Fed had been operating in for a dozen years. Inflation below target. Secular stagnation,” said Clarida, now global economic adviser for Pimco. But “2025 is not 2020. We have policy space.”