Powell said last night that he wants to 'adjust the overall policy framework.' This sounds quite official, but the underlying meaning is quite down-to-earth.
The Fed's policies have never been pre-planned; they have always been pushed step by step by reality, saving whichever area has a problem first. When interest rates were too low and deflation risks were high, the Fed created an 'Average Inflation Target' (AIT) to find ways to raise inflation a bit, providing some breathing room in policy space to avoid falling into a zero-interest-rate trap like Japan.
But this logic can no longer be applied. The core issue now is not deflation, but high inflation. Forcing it under AIT means having to keep inflation suppressed to average back to 2%, but the cost is too high, and Powell does not want to do that. He prefers to adjust flexibly based on reality rather than adhering to a framework.
During the pandemic, they were fully focused on supporting employment; as long as employment did not improve, they would continue to inject liquidity. However, with inflation high now, even if employment remains strong, they must keep a close watch.
It is no longer 'I will step in when there's a problem,' but rather 'I will intervene if it is too hot,' because the underlying intention is to stabilize the linkage between wages and inflation, ensuring that people do not lose confidence in future prices.
From the tone of this speech, Powell has completely shifted to realism, not making assumptions or commitments on a path; he will respond according to how the market changes.
Many people feel he still has a lot of room to maneuver, often saying 'there are still hundreds of basis points to cut,' but Powell knows very well that if fiscal policy does not cooperate, no matter how many tools he has, he won't be able to use them effectively. This is also one of the reasons he has been concerned about the ZLB (zero lower bound).
Because the real factor affecting the macro rhythm is no longer the Fed, but fiscal policy leading the way; the Fed is more like a fire brigade, extinguishing fires as they arise, but the main storyline is not written by me.
Therefore, this so-called 'adjustment to the framework' is more like a summary and correction of previous operations.
It is not aimed at being more forward-looking, but rather to free up space from past mistakes, allowing for some flexibility. What Powell wants to convey is neither a hawkish nor dovish shift,
but to tell the market: We have also made mistakes that central banks tend to make in the past, and now we will no longer rigidly adhere to any theory, but will respond practically to each real issue, and that's it.
In summary: Don't expect the Fed to draw candlestick charts for the market anymore. From now on, policies will follow how the data moves.
