Powell's monetary policy framework is essentially the rules by which the Federal Reserve decides on interest rates. This means that the Federal Reserve's tolerance for inflation has increased, and the market believes that rates may be cut soon.
Why change the rules? Because the economic environment has changed over the past decade. After the 2008 financial crisis, the U.S. experienced long-term low growth, low inflation, and low interest rates; whenever the central bank faced problems, it would lower interest rates, and eventually ran out of options. When the pandemic hit in 2020, the Federal Reserve introduced a new framework, but then faced chaotic supply chains and surging demand, causing inflation to spike to 6%. They reacted slowly and had to raise rates aggressively.
Powell acknowledged that the current situation is different from 2020, so a reassessment of policy is necessary. He stated that the 2% inflation target remains unchanged, but historical averages will no longer be considered. This is somewhat like an exam; previously, the teacher said if you did poorly, you could make up for it later, but now they say only this exam's score matters, yet the full score is still 100 points.
The market feels that with the rule change, the Federal Reserve might be more willing to cut rates since they won't be entangled with past inflation data. However, Powell also mentioned that if inflation remains too high or if the unemployment rate suddenly rises, they might have to raise rates again or maintain high rates. The Federal Reserve is now in a bit of a dilemma, needing to control inflation while also preserving employment, prioritizing whichever issue is more urgent.
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