Federal Reserve Chairman Jerome Powell on Thursday said that the central bank's framework for setting monetary policy may need to be adjusted to account for the possibility that supply shocks will become more common given the difficulties they pose for policymakers.
In remarks that focused on the central bank’s policy framework review, last done in the summer of 2020, Powell noted that conditions have changed significantly over the past five years. "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 chairman added.
Powell added that while the Fed is experimenting with some minor changes to its approach to monetary policy, its core long-term inflation objective will remain unchanged, explaining: "Standard expectations are essential to everything we do, and we are fully committed to our 2% target for inflation."
During the tumult of the summer of 2020, the Fed announced a “flexible average inflation target” approach that would allow inflation to run a little hotter than normal in the interest of providing full and inclusive employment. However, inflation targeting soon became a dead issue as prices soared in the wake of the Covid pandemic, forcing the Fed into a series of historically aggressive rate hikes.
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