Last week marked the 48th Economic Policy Symposium in Jackson Hole, Wyoming — a key gathering of central bankers, policymakers, and economists from around the world. Originally centered on policy presentations, the event has evolved into a forum for the Federal Reserve Chairman to deliver major policy announcements.
In his address, Chair Jerome Powell focused on two themes: current economic conditions and monetary policy stance, and the unveiling of the Fed’s new Strategic Plan. His assessment of current conditions signalled greater concern over labour market weakness than over inflation running above 2 per cent, fuelling expectations of policy easing. The updated Strategic Plan also eliminates some of the key asymmetries in the 2020 framework that learned toward tolerating higher inflation while prioritizing maximum employment.
In assessing the current state of the economy, Powell noted that tariffs, immigration policies and related uncertainties have weighed on performance, slowed growth and weakened labour markets. Inflation remains elevated, with the impact of tariffs increasingly evident in consumer prices. Still, despite inflation running above the 2 per cent target for much of the past four years, both survey-based and market-based expectations remain anchored around the Fed’s 2 per cent long-run inflation target.
Coming into the meeting, the bond market was pricing in not only a high probability of a 25 basis point cut in September, but also a roughly 15 per cent chance of a 50 basis point cut. In his speech, Powell opened the door to easing, noting that “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
Markets rallied on the news. Rate cut expectations for September rose from 18.8 to 21.9 basis points, a modest shift that nevertheless triggered a 1.5 per cent jump in S&P500, pushing it to a new record high. Financial markets clearly remain supportive of growth.
One important caveat to keep in mind is the level of the natural real rate of interest — the neutral rate or r-star — consistent with an economy growing at its potential and inflation at the Fed’s 2 per cent target. In its June 2025 Summary of Economic Projections, the Fed placed r-star at 1 per cent. If the true neutral rate is higher, monetary policy may not be as restrictive as the Fed currently perceives.
A key part of Powell’s speech for investors was the unveiling of the Fed’s updated monetary policy framework. The new 2025 framework statement, available on the Board’s website, essentially turns the clock back to the original framework first released in 2012. Powell outlined four main changes in his remarks:
First, “we removed language indicating that the ELB [Effective Lower Bound] was a defining feature of the economic landscape.” This language had encouraged the Fed to lean dovish given the challenges of conducting policy when the policy rate was near zero.
Second, “we returned to a framework of flexible inflation targeting and eliminated the ‘makeup’ strategy,” ending the Fed’s previous emphasis on targeting average inflation of 2 per cent.
Third, “our 2020 statement said that we would mitigate ‘shortfalls,’ rather than ‘deviations,’ from maximum employment.” The updated framework makes clear that if the unemployment rate falls too low, the Fed will tighten policy.
Fourth, “consistent with the removal of ‘shortfalls,’ we made changes to clarify our approach in periods when our employment and inflation objectives are not complementary. In those circumstances, we will follow a balanced approach in promoting them.”
By moving away from the 2020 Strategic Plan, which allowed for a more asymmetric approach to monetary policy, the Fed adopted a framework that does not include a numeric target for employment. The 2012 Plan had similarly noted that a numeric employment target was inappropriate, since labour markets are influenced by many non-monetary factors beyond the Fed’s control.
This approach suggests a Fed that will be more responsive to inflationary pressures and less likely to follow the same policy playbook used during the pandemic.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
The Large Urban Centre Alliance of developers has proposed a set of housing recommendations ahead of the federal pre-budget consultations.
In Part 2 of our two-part review, we examine the secondary recommendations, from tying federal infrastructure funding to pro-housing supply initiatives to creating incentives for investment in purpose-built rental projects. While each has merit, the challenge lies in implementation.
Read the full analysis in our latest Housing Affordability Watch: Reviewing the Builder Alliance Pre-Budget Proposal: Part Two – Secondary Recommendations
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