This Friday (August 22), Federal Reserve Chairman Jerome Powell will deliver what could be his last speech in Jackson Hole, Wyoming, during his current term. Investors will closely watch for any signals of an interest rate cut next month. But more importantly, Powell is expected to outline a more overarching reform framework for the Fed's dual mandate—changes that will not only persist beyond the end of his term next May but also form a significant part of his political legacy.

Powell will articulate his economic outlook in Jackson Hole. However, there is greater external anticipation that he will announce adjustments resulting from the Fed's policy framework review—a framework that explicitly defines the Fed's strategy and commitment to achieving the congressionally mandated goals of stable prices and maximum employment. Notably, the Fed is expected to abandon the so-called "average inflation targeting" strategy. This policy, devised pre-pandemic during a period of persistently low inflation, was intended to help Fed officials avoid deflation risks.

This strategy had stipulated that if inflation had consistently run below 2% in previous years, the Fed would tolerate future inflation overshooting above 2%, based on the theory that the long-term average would balance out. Given the recent surge in inflation and the risks it poses to inflation expectations and consumer confidence, the Fed is anticipated to discard this approach and refocus solely on achieving the 2% inflation target.

Powell had already signaled such an adjustment in a speech back in May.

At that time, Powell stated: "In discussions so far, participants have generally recognized the need to revisit the characterization of 'short-term deviations,' and at last week's meeting, we reached a similar consensus regarding average inflation targeting."

The Fed first established its monetary policy framework in 2012, adhering to a mechanism for review every five years. The current Fed is re-examining the policy strategy, tool usage, and communication mechanisms last revised just before the pandemic outbreak in 2020—a system that has now been in place for four years.

Just as the adjustments announced in 2020 profoundly influenced monetary policy actions over the past five years, the reforms Powell unveils this Friday are also likely to have a lasting and profound impact for years to come.

Some Fed watchers believe the Fed's previous strategy of allowing inflation to moderately exceed 2% to compensate for earlier low inflation partly contributed to its delay in raising interest rates when inflation surged post-pandemic. The view that supply chain bottleneck-induced inflation was transitory ultimately forced the Fed to raise rates at the most aggressive pace since the 1980s.

Matthew Luzzetti, Chief US Economist at Deutsche Bank, pointed out, "While the new framework adopted in 2020 was not the primary cause of the Fed's slow action and significant inflation overshoot, it certainly contributed to that outcome." He also mentioned that he expects Powell's speech to re-establish a more pre-emptive monetary policy strategy, acknowledge supply shock risks, and restore a balanced assessment of inflation and the labor market.

James Fishback, CEO of hedge fund Azoria, agreed, noting that Chairman Powell needs to acknowledge the "failure" of his so-called average inflation targeting. He drew an analogy: it's like a patient rushing into the ER with a 41-degree fever (105.8°F) only to be told the doctor won't treat it because the average temperature over the past two weeks has been a healthy 37 degrees (98.6°F).

Fishback noted: "The origin of the 2021-2022 great inflation wasn't the supermarket or the gas station—it began in Jackson Hole, Wyoming, in August 2020. In this Friday's announcement reviewing the new framework, Chairman Powell must acknowledge the significant failure of flexible average inflation targeting and remove it from the Fed's policy toolkit. Only then can the Fed faithfully fulfill its dual mandate."

In his May speech, Powell particularly emphasized that future inflation volatility could far exceed levels seen in the 2010s, suggesting the US might be entering a new economic cycle with more frequent and potentially more persistent supply shocks.

Powell stated clearly in his May speech: "The economic environment has changed significantly since 2020, and our framework review will reflect an assessment of those changes."

He also emphasized the importance of improving the Fed's formal policy communication mechanisms, especially regarding economic projections and uncertainty assessments. Investors will closely watch whether the Fed makes adjustments to its quarterly Summary of Economic Projections (SEP)—a document that includes the famous "dot plot," which aggregates each Federal Open Market Committee member's interest rate expectations for the coming years.