The Most Important Headline that May Come out of Jackson Hole

The annual Jackson Hole Economic Policy Symposium—the Super Bowl for central bankers and economists hosted by the Federal Reserve—starts Friday, and I believe there is far more at play than a search for clues about a potential interest-rate cut in September. I think those who listen carefully might pick up on a profound shift in how the Fed operates beyond short-term rate movements.  

The generic title of Chair Jerome Powell’s speech on Friday is “Economic Outlook and Framework Review,” which is wide open to pre-meeting interpretation. However, I believe it is important to remember that this symposium comes at a time when the Fed has been undergoing a comprehensive policy review. And I think it’s wise to keep in mind the Fed has three congressional mandates (not two): 1) Price stability; 2) Maximum employment; and 3) what I have deemed social stability (technically it’s moderate long-term interest rates). I believe this third mandate will likely to be revised at the symposium.

The last such policy review concluded in 2020 and resulted, in my opinion, in profound shifts to Fed policy. I believe if greater attention had been paid to these changes, the market would have provided with valuable clues to how the Fed would react to changes in the economy going forward. In particular, I believe the central bank unofficially revised its third mandate from “moderate long-term” interest rates to “social stability.” To me, this shift explained the Fed’s muted reactive (rather than proactive) policy approach in the face of rising inflation in recent years. I believe the new policy showed the central bank was willing to tolerate above-trend inflation coming from persistently high services inflation from lower income earners.

With that background, here is what I expect from this year’s symposium:

• I think there is unlikely to be fireworks if Chair Powell directly signals a September cut. However, I do expect a slight nod toward a 25-basis-point cut, but a heavy push against a 50-basis-point reduction with Chair Powell reiterating the “tension” between persistent inflation and a continued strong (but weakening) labor market.
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• I believe the Fed will generate more important news, which may fly under the radar of most observers. I think the central bank is likely to redefine its third mandate away from “social stability” toward “inflation expectations’ stability,” emphasizing the need to ensure stable inflation expectations firmly anchored near its 2% definition of price stability. If the third mandates shifts in this direction, I’d suggest that it will provide of significant clue for what the Fed’s next moves will be.

As Yogi Berra said, “It’s tough to make predictions, especially about the future.” I may be proven quite wrong in a very short period of time. However, if the above plays out, this will have profound implications that go beyond Chair Powell’s tenure, including:

• Markets are expecting a significant cutting cycle, despite persistent inflation and the reality that we remain in a period of heightened uncertainty surrounding tariffs. I believe the potential for disappointment is high if the Fed considers “inflation expectations’ stability” as part of its decision making.
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• Chair Powell’s term ends mid-2026, but the Fed undergoes this policy review only once every five years. Thus, any new framework laid out Friday is likely to persist throughout Trump’s presidency.
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• And on a related note, I think there is a chance the Fed doubles down on its mission to act as a politically independent body focused squarely on ensuring inflation remains well anchored regardless of fiscal policy.

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