Federal Reserve Chair Jerome Powell announced a significant policy shift at the Jackson Hole Economic Symposium on August 22, 2025, signaling a return to a conventional 2% inflation target as measured by the Personal Consumption Expenditures (PCE) price index. This change abandons the 2020 “makeup” policy, which had permitted inflation to run above 2% to compensate for prior periods of below-target inflation, marking a decisive move away from flexible inflation averaging. The revised framework places a renewed emphasis on price stability alongside maximum employment, without explicit allowances for inflation to overshoot the target. This policy reset reflects the Federal Reserve’s efforts to manage inflation dynamics in a post-pandemic environment, where elevated inflation levels persisted beyond initial expectations.
The updated Statement on Longer-Run Goals and Monetary Policy Strategy narrows the focus back to a firm 2% inflation goal while maintaining the dual mandate of maximum employment and stable prices. Unlike the previous approach, which allowed for flexible inflation averaging over time, the current strategy eliminates explicit emphasis on compensating for employment shortfalls through inflation overshoot. Although monetary policy tools such as quantitative easing remain available, their application now centers more squarely on controlling inflation. This shift incorporates lessons learned from the pandemic-era monetary stimulus and its unintended consequences on price levels. It also removes language focusing on employment shortfalls to adopt a more balanced stance between employment and inflation objectives.
Powell indicated that interest rate adjustments would remain data-dependent, with the possibility of rate cuts beginning in September 2025 if inflation continues to decline and labor market conditions soften. While inflation remains above the target, it has steadily decreased from the post-pandemic highs, reducing the risk of persistent upward pressure. Concurrently, the unemployment rate has risen by nearly one percentage point since the adoption of a restrictive policy stance, an unusual development typically associated with economic slowdowns. The Federal Reserve’s near-term outlook carefully balances the need to sustain inflation moderation while monitoring evolving labor market dynamics.
The broader economic context underscores the rationale for this policy reversal, as the post-pandemic economy showed resilience but faced persistent inflationary pressures requiring recalibration. Inflation rates, though approaching target levels, remained somewhat elevated, prompting reassessment of policy effectiveness. Labor markets near maximum employment have begun to cool as inflation control measures take effect, shifting the balance of risks from inflation overshoot to managing slower growth and employment conditions. The Federal Reserve’s previous strategy of inducing inflation overshoots to compensate for pandemic disruptions is now deemed less appropriate, warranting a return to a more conventional targeting framework.
