In his speech at Jackson Hole today, Chair Powell revealed changes to the Statement on Longer-Run Goals and Monetary Policy Strategy (the “Consensus Statement” for short) as part of its regular framework review.

The Committee removed the “shortfalls” language from the Consensus Statement, with Powell citing “communications challenges.” Last week, we advocated for retaining the 2020 Consensus Statement’s changes around full employment, arguing that the “shortfalls” language was an appropriate response that addressed failures of Fed policy in previous years and was instrumental in delivering the rapid recovery from the 2020 recession.

Although the Committee removed the “shortfalls” language, the new Consensus Statement also includes the language that “employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability.” On the whole, this is a reasonable change that retains the key reasoning behind the changes in the previous Consensus Statement: that real-time estimates of full employment metrics are highly uncertain, and that preemptively reacting to a strict level of employment and unemployment rate, without assessing corresponding inflation risk, can leave critical labor market gains on the table.

Powell’s speech echoes some of our arguments for keeping the 2020 Consensus Statement’s language around full employment. We argued that the 2020 Consensus Statement’s key contributions were to encourage the Committee to see full employment as a concept that extends beyond the deviation of the unemployment rate from some estimate of its natural rate, and to underscore that such estimates were highly uncertain. In his speech, Powell emphasized that the change around “shortfalls” is a clarification, not a retreat. He also cited a recent FEDS paper arguing that a variety of labor market metrics are useful at different times throughout the business cycle.

The new Consensus Statement also reverses the inflation makeup language from the previous framework, which stated that the Fed would allow inflation to run “moderately above 2 percent for some time” following periods of persistent inflation undershooting. This is an obvious reaction to the experience of 2021-2022, but as Powell said in his speech, “the idea of an intentional, moderate inflation overshoot had proved irrelevant” during that period given the magnitude and nature of that inflation. The forward guidance around overshooting inflation during that period could have been improved, but throwing out makeup policy altogether seems like an overreaction.

Finally, the biggest misstep in the update to the Consensus Statement is what was left unsaid: any changes around the way that the Fed intends to deal with supply shocks. For all of his talk about the role of pandemic supply shocks and difficulty of interpreting inflation as tariffs work their way through measured inflation, the updated Consensus Statement does not contain any new language that prepares them for facing those challenges.

The last five years saw both success and failures in Fed policy and communication. It’s understandable for the Fed to think about changes that address those failures, but they are fighting the last war when the next war is at the doorstep. The review of their communications will be the final chance for them to recognize how a myopic focus on short-term inflation yields confused assessments and public understanding. The lack of any changes to the Consensus Statement that deal with navigating the supply problem (where we’ve made suggestions with specific language changes) is a missed opportunity.

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