Federal Reserve Chair Jerome Powell said on Thursday that long-term interest rates are likely to remain elevated as economic dynamics shift and monetary policy adapts. Speaking at the Thomas Laubach Research Conference in Washington, D.C., Powell emphasised that significant changes in the economic landscape over the past five years—particularly in the aftermath of the COVID-19 pandemic—pose new challenges for central bankers. He stated that while inflation expectations remain anchored near the Fed’s 2% target, the environment that once allowed for near-zero interest rates has likely passed.
“Higher real rates may also reflect the possibility that inflation could be more volatile going forward than in the inter-crisis period of the 2010s,” Powell said. “We may be entering a period of more frequent, and potentially more persistent, supply shocks — a difficult challenge for the economy and for central banks.” Since the 2008 financial crisis, the Fed kept its benchmark rate near zero for years, but a sharp inflation surge in the early 2020s forced an aggressive tightening cycle. As of now, the fed rate stands in a range of 4.25% to 4.5%.
Powell’s remarks build on his recent warnings that a changing economic environment—including potential trade disruptions and supply constraints—could make monetary policy harder to manage. Although he didn’t reference US President Donald Trump’s proposed tariffs directly, Powell and other Fed officials have recently acknowledged that such measures could dampen growth while adding inflationary pressure. Despite some easing since last year’s full-point rate cut, the Fed remains cautious about loosening policy prematurely.
Framework review in progress
Powell also discussed the Fed’s ongoing review of its policy framework, a process last completed in 2020. The central bank is developing a new five-year plan to reassess how it sets policy and communicates with the public. The review will revisit elements of the 2020 strategy, including the “flexible average inflation target,” which allowed for inflation to temporarily run above 2% to promote broad employment. That approach was quickly sidelined by the sharp price increases that followed the pandemic. This time, Powell said the Fed will scrutinise how it addresses “shortfalls” in achieving inflation and employment targets, and whether the previous communication strategies were sufficient in the face of evolving economic shocks.
“In our discussions so far, participants have indicated that they thought it would be appropriate to reconsider the language around shortfalls,” Powell said. He added that policymakers are also revisiting how the average inflation targeting strategy should be framed moving forward. “We will examine ways to improve along that dimension as we move forward,” he said. Though Powell did not specify when the review will be completed, he suggested it would conclude in the “coming months.” In 2020, the Fed’s framework update was formally announced during his keynote address at the annual Jackson Hole symposium—a possible venue for this year’s update as well.