The Federal Reserve is likely to implement a more accommodative monetary policy soon. Federal Reserve Chairman Powell's latest statement indicates a reevaluation of the Fed's policy framework. The language is very subtle and requires careful consideration to understand its meaning.

Firstly, to 'formally' modify inflation and employment targets, abandoning the average inflation targeting framework and returning to a traditional inflation targeting framework.

Why is it called 'formal'? Because after the pandemic, the Federal Reserve has essentially already abandoned the average inflation targeting framework; it is just confirming this in the current review.

The reason is that the average inflation targeting framework was a product designed to prevent 'deflation' in a 'low inflation' environment where inflation was persistently below 2% before the pandemic, with the goal being to [raise] inflation expectations.

The theoretical background behind this is the asymmetry in monetary policy, 'pushing a string vs. pulling a string', meaning that managing deflation (pushing a string) is much more challenging than managing inflation (pulling a string). After the pandemic, the economy is in a 'high inflation' environment where inflation is consistently above 2%, so the product designed to prevent deflation and raise inflation expectations should naturally be abandoned.

If this average inflation targeting is not abandoned, it would mean that the Fed would need to keep inflation below 2% for a period of time, which could easily lead to deflation or even a deflationary spiral, making it more difficult to address and contradicting the original intention of AIT (to prevent deflation).

At the same time, the employment target will also be modified accordingly. Previously, the focus was only on being below the employment target, allowing for a tight labor market, which was also a product of the 'low inflation' period. Now, similar to the inflation target, it will revert to a traditional, biased employment target.

Secondly, there is consideration to improve the method of policy communication.

This may refer to optimizing the current dot plot system, which has been criticized for its guidance, especially in the past few years following the pandemic, often amplifying market volatility.

If improvements are made, how specifically will they be improved?

Reduce the frequency of dot plot releases? Change from quarterly to semi-annually? This possibility seems small;

Or, emphasize scenario analysis and probability ranges? Instead of merely highlighting the number of rate cuts indicated by the dot plot?