On August 22 this year, Federal Reserve Chairman Jerome Powell delivered the opening speech at the Jackson Hole Economic Symposium. The first half of his speech analyzed the current economic situation and hinted at a September rate cut, which was the focus of market attention. The second half introduced the newly revised monetary policy framework, but this part did not attract much market attention.
The Fed began publicly disclosing its monetary policy goals and framework in 2012, the same year it adopted inflation targeting. According to regulations, this framework is revised every five years, and the currently adopted framework must be "announced" annually. This is the FOMC's (Federal Open Market Committee) annual "Statement on Longer-Run Goals and Monetary Policy Strategy." There are two reasons for the "repeated" annual announcements within the same revision cycle: first, to enhance the credibility of the Fed as an institution, demonstrating that it "remains true to its original aspirations." Second, this statement is internally referred to as the "Consensus Statement" within the Fed. All 19 FOMC members (12 of whom vote at each policy meeting) participate in wording deliberations, and each ultimately agrees. This consensus on policy goals and methodology helps promote collective decision-making while strengthening members' self-discipline (after all, the policy goals and methodology are agreed upon by each individual). Repeated statements serve as a "reminder" to the members.
Continuity and Change in the New "Consensus"
The first paragraph of the 2025 Consensus Statement discusses the Fed's mission and the importance of increasing transparency, continuing the wording from 2024.
The second paragraph discusses the economic mechanisms by which inflation and employment deviate from the mission goals and the basic policy tools to promote achieving these goals. The 2025 statement's second paragraph has an important addition: "The Committee's monetary policy tools need to be able to accomplish the employment and inflation missions under a wide range of economic conditions." This section can be seen as a reflection on the 2020 framework. During 2012-2019, the U.S. economy experienced prolonged low inflation (core PCE inflation averaged 1.4%), and the unemployment rate was relatively high before 2016. Therefore, the Fed's primary concern was the entrenchment of a long-term low inflation and low interest rate environment, which would cause the ELB (Effective Lower Bound) problem, meaning the normal policy rate would be too low, leaving insufficient room for rate cuts when facing economic downturns. The 2020 policy design specifically targeted the dominant environment described above. After the second half of 2021, the Fed found that this overly targeted strategy had significant limitations, reacting too slowly when inflation unexpectedly surged. This reflection led to the aforementioned changes in the consensus statement.
The second paragraph of the 2020 statement devoted considerable space to discussing the decline in the natural rate of interest, the Fed's constraint by the effective lower bound on interest rates, and the Fed's basic assessment at the time of increasing downside risks to employment and inflation. By 2025, these discussions were simplified to: "If the policy rate faces constraints from the effective lower bound, the Fed will use all available tools (to overcome it)." It can be seen that the new version significantly downplays the severity of the ELB. Understandably, this shift stems from the high inflation experience since 2021.
The third paragraph concerns the employment mission. Both versions state that "the maximum level of employment changes over time due to many factors and therefore the Committee does not set a fixed target." However, the 2025 version adds: "The Committee judges that maximum employment is the highest level of employment that can be sustained while maintaining price stability." In contrast, the 2020 version did not provide such a clear definition of maximum employment, instead stating more vaguely that it uses a range of indicators to assess maximum employment. Correspondingly, the employment goal in the 2025 policy statement directly targets maximum employment and is symmetric, meaning monetary policy needs to change regardless of whether actual employment is above or below the maximum employment level. In contrast, the 2020 version only reacted to employment shortfalls. If employment levels were above maximum employment, monetary policy would not adjust. This is a significant change, also due to the high inflation of the past few years exceeding the Fed's expectations.
The 2020 version implied that the Fed at that time believed the Phillips Curve was flat, meaning lower unemployment would not lead to high inflation, thus favoring letting the labor market "run hot." In 2021, the Fed implemented this strategy. Although the inflation surge in 2022 caught the Fed off guard, this approach of acting according to established rules demonstrated the credibility of the Fed's statements. A loss in one area may lead to a gain elsewhere; this credibility was largely the main reason for the U.S. economy's soft landing during 2022-2024.
Regarding the price stability mission, both versions of the statement confirm that long-term inflation depends on monetary policy, and thus the Fed is responsible for price stability. Both versions confirm 2% as the inflation goal and emphasize the importance of maintaining long-term inflation expectations at 2%. The difference lies in that the 2020 statement stated: "The Committee seeks to achieve inflation that averages 2 percent over time; therefore, following periods when inflation has been running persistently below 2 percent, the Committee will aim to achieve inflation moderately above 2 percent for some time (as compensation for the previous low inflation)." The 2025 statement shows a major change: the goal is 2%, no longer an average of 2%. The implication of this change is that if past inflation was below 2%, future policy will not seek higher inflation to "compensate."
The discussion on the balance of risks remains unchanged between the old and new versions of the consensus statement. The methodology of risk balancing is the main basis for Powell's communication with the market regarding the September rate cut.
Transition Between Old and New Frameworks: Further Discussion
At an internal Fed seminar in May 2025, Powell reviewed the background of the 2020 framework. In addition to the reasons discussed above, he also mentioned the role of deepening globalization at that time in promoting low inflation in the U.S. The prolonged experience of low inflation had a profound impact on the mindset of Fed policymakers.
At the same seminar, Professor Carl Walsh from the University of California also gave an important speech. He pointed out that another reason prompting the Fed's "inflation-promoting framework" in 2020 might have been the "mistake" of raising rates too early in 2015. The rate hike cycle that started at the end of that year proceeded slower than expected; for example, there was only one hike each in 2015 and 2016. By the end of 2018, there was significant economic downward pressure, and the Fed began cutting rates in 2019. The benefit of average inflation targeting is that it can raise market inflation expectations, while monetary policy becomes somewhat stickier because it looks at past average inflation. Monetary policy focusing on the employment shortfall target could allow the economy to overheat, thus having advantages in a low inflation environment.
One shortcoming of the 2020 version was that the Fed's commitment to 2% long-term inflation might no longer be credible because the public might find it difficult to understand the exact meaning of average inflation. Suppose the current inflation rate is 4%, but the Fed does not tighten monetary policy because it needs to compensate for past low inflation. The public might then extrapolate linearly to form inflation expectations, so inflation expectations could be 4% or higher, not the 2% intended by the policy. Furthermore, average inflation targeting was not clear enough; the window for calculating the average—whether 3 years, 5 years, or 8 years—was not clearly defined by the Fed. After the 2025 new version reverted to flexible inflation targeting, these difficulties disappeared. The 2020 Fed consensus did not clearly define what maximum employment is, making this mission less clear. The 2025 new version clarified this.
Whether the new or old framework, over the past decade or so, the Fed's policy framework has demonstrated the comprehensive application of New Keynesian macroeconomics in monetary policy, becoming increasingly mature. Before Greenspan, central banks were mysterious, looking down from on high at the entire macroeconomy and then silently intervening to regulate the economy. The Fed after Greenspan, under the leadership of two top academic macroeconomists, has embedded rational expectations, dynamic equilibrium, and public disclosure of policy intentions deep within its systemic framework. In retrospect, this is a massive change.
The Fed's Independence, Transparency, and the Source of Power
Former Chairman Ben Bernanke also participated in the May seminar and gave a keynote speech. He discussed the reasons and specific tools for further increasing the transparency of Fed policy. Bernanke suggested that the Fed's research department publicly release analyses and forecasts of major possible economic scenarios (risks). He recommended that the FOMC depict more economic scenarios in its different communication tools, explain the monetary policy response for each scenario, and convey more risk "awareness" to the public through multi-scenario discussions. Additionally, Bernanke suggested adding more textual description to the SEP (Summary of Economic Projections).
Interestingly, senior Fed officials almost unanimously opposed this suggestion from the "former leader." Waller rebutted using the 2023 Silicon Valley Bank crisis as an example. At that time, the research team and the Committee had significant differences in views. Waller pointed out that if researchers' forecasts were published, the Fed's governance structure could be affected (meaning researchers would de facto gain some of the FOMC's power). The most interesting scene came from the debate between Bernanke and the discussant. The discussant, from Yale University, opposed almost Bernanke's entire plan. He gave an example: if the researchers' forecasts differed greatly from the FOMC's views, he wouldn't know how to explain it to the market. Bernanke quickly retorted, "It's a pity that has never happened." The discussant countered that it had happened, citing the mid-1990s when the Fed's research team was worried about inflation, but Greenspan opposed, believing productivity growth would offset inflationary pressures. Bernanke rebutted again, "But the entire FOMC committee at that time highly agreed with the research team's view," and then interjected, "But they were wrong." With this last sentence, Bernanke was referring to Greenspan's celebrated success at that time (he went against the majority opinion and did not raise rates, and later proved right), while also serving as a self-deprecating remark about the FOMC at that time, which caused the audience to laugh (though Bernanke himself remained expressionless throughout).
Bernanke's advocacy for greater transparency is significant, especially when the Fed's independence is under threat. Where free expression is possible, power comes from the weight of reasoning. If one's competence is insufficient, then their voice carries limited weight, meaning less power. During the Q&A session at Bernanke's seminar, a branch president without formal training in macroeconomics used a more通俗 (popular) example to rebut Bernanke's proposal, but the concept was somewhat off-topic and the logic not very coherent, to which Bernanke did not respond.
Yellen is another case. When she first joined the Fed as a governor, she "pressed" Greenspan at a meeting: What is your preferred inflation target? Can you give a number? After hesitating for a long time, Greenspan indicated he thought 2% was appropriate. This conversation is considered a precursor to pushing the Fed towards inflation targeting. Yellen was not yet prominent then, a newcomer to Washington, but she challenged Greenspan based on her knowledge.
Recently, Trump has continuously been "installing his own people" into the Fed, and the Fed's independence seems precarious. The requirement for all FOMC members to participate in the "Consensus Statement," in my view, is an inconspicuous but crucial link in maintaining the Fed's independence. If a member violates his own consensus statement during a policy meeting, others will rebut him. In a group that highly values "intellectual excellence," this can be quite "humiliating." There are eight FOMC policy meetings a year; being "insulted" like this every time would indeed create significant pressure.
Institutional economists have not produced many profound results on how institutions can be effective (i.e., constraints from text to reality), mainly because they have abandoned (or failed to understand) Commons' important concept that "institutions are collective coercion of the individual." I believe the importance of this concept for understanding institutions is equivalent to that of effective demand in macroeconomics and liquidity preference in monetary economics—they are invisible and intangible but real and eternally present. I believe that without Commons' insight, one cannot find the "genetic" mechanism through which institutions work, because it is the essence. For example, the genetic code for the effectiveness of the Fed's "Consensus Statement" institution is as follows: an FOMC member who abandons the monetary policy consensus statement and only follows orders from the White House would be "humiliated" by other members in debates. Such a member would inevitably lack confidence and conviction (in stark contrast to Yellen's confident challenge to Greenspan mentioned above). This is collective coercion of the individual. This is how the institution of Fed independence from the White House (one of them) takes effect. How to form collective coercion of the individual is also the genetic code for parsing power. Mystery and obscurantist conservatism are often linked, while disenchantment and enlightened progress are closely connected. I believe Commons is the one who helped with disenchantment.
When I first read Commons in my youth, I was ecstatic. What I had vaguely perceived but couldn't articulate was expressed by him so effortlessly, concisely, and accurately. I still vividly remember looking up at the sky and laughing heartily, slapping the railing repeatedly. Public commitments are binding, language is power, and now, with the support of Commons' institutional insight, my confidence in the Fed's independence has increased, and the theory of the U.S. dollar's collapse can thus be ruled out.
