Powell's Jackson Hole Closing Speech Preview: Plans to Abolish Average Inflation Target and Reshape Federal Reserve Policy Legacy

The Zhitong Finance APP noted that when Federal Reserve Chairman Jerome Powell delivers his last speech in office this Friday in Jackson Hole, Wyoming, investors will focus on whether he signals a rate cut in September.

However, Powell may elaborate on a more profound transformation of the central bank's dual mandate—these changes will continue long after his term ends in May next year and become an important part of his policy legacy.

Powell will outline the economic outlook in Jackson Hole, but the market expects him to announce adjustments to the Federal Reserve's policy framework assessment. This framework clarifies the strategies the Federal Reserve employs to achieve the dual mandate of price stability and full employment as assigned by Congress.

It has been revealed that the central bank is likely to abolish the "average inflation targeting"—a policy established before the pandemic that was born in a low-inflation environment and aimed at preventing deflation risks.

The strategy originally stipulated that if the inflation rate remained below 2% for several years, the Federal Reserve would allow future inflation to overshoot to bring the long-term average closer to 2%. However, in light of the recent surge in inflation and its impact on expectations management and consumer confidence, the Federal Reserve is expected to abandon this strategy and re-anchor the single inflation target at 2%. Powell hinted at this shift as early as his speech in May.

"In the current discussions, participants generally believe there is a need to reassess the statements regarding the 'inflation gap,'" Powell stated. "At last week's meeting, we reached a similar conclusion regarding the average inflation targeting." The current monetary policy framework of the Federal Reserve was established in 2012 and is revised every five years. This revision will reassess the policy strategies, tools, and communication mechanisms from the last adjustment before the pandemic in 2020.

Just as the adjustments in 2020 influenced the direction of monetary policy over the past five years, the changes announced by Powell on Friday could have ripple effects lasting for years.

Some observers believe that the Federal Reserve's previous tolerance for inflation overshooting to compensate for historically low inflation contributed to its slow response when inflation surged post-pandemic. Misjudging the temporary nature of inflation caused by supply chain bottlenecks ultimately forced the Federal Reserve to raise interest rates at the most aggressive pace since the 1980s.

Matt Luzetti, Chief U.S. Economist at Deutsche Bank, pointed out that "while the new framework adopted in 2020 is not the main cause of policy delays and runaway inflation, it did exacerbate the consequences."

He expects Powell's speech to restore a more forward-looking policy strategy while acknowledging the risks of supply shocks and rebuilding a balanced perspective on inflation and the labor market.

James Fishback, CEO of hedge fund Azoria, agreed with this view. He urged Powell to acknowledge the "fallacy" of average inflation targeting, likening it to "rushing into the emergency room with a 41-degree fever, only to be told that treatment will not be provided because the average body temperature has been normal for the past two weeks."

Fishback emphasized: "The great inflation of 2021-2022 did not begin at supermarkets or gas stations—it was seeded back in August 2020 in Jackson Hole, Wyoming. If the Federal Reserve is to faithfully fulfill its dual mandate, Powell must acknowledge the significant error of flexible average inflation targeting on Friday and completely remove it from the policy toolbox." Powell warned in his speech in May that future inflation volatility could be significantly higher than the levels seen in the 2010s, and the U.S. may face more frequent and persistent supply shocks. "The economic environment has changed dramatically since 2020, and our assessments will reflect these changes."

He stated at that time. Powell also emphasized the need to optimize the Federal Reserve's policy communication mechanism, particularly regarding the expressions related to economic forecasts and uncertainties. Investors are closely watching whether the Federal Reserve will modify the quarterly economic outlook report that includes the "dot plot"—a chart summarizing the median interest rate expectations of the Federal Open Market Committee members for the year