Tonight, Federal Reserve Chairman Powell said in a speech that long-term interest rates may rise as the economy and policy continue to change. "We may be entering a period where supply shocks are more frequent and possibly longer - this is a difficult challenge for the economy and central banks," he warned.

At the same time, Powell also revealed that the Fed is adjusting its overall policy-making framework to deal with major changes in inflation and interest rate outlook after the epidemic in 2020, and plans to complete the review of specific revisions to the framework in the next few months.

As the US CPI data in April continues to cool down, market focus has shifted to whether the Fed will restart interest rate cuts. Wall Street analysts currently generally expect that the price uptrend driven by tariff policies in the next few months may become more obvious, making the Federal Reserve hesitant to cut interest rates.

Powell speaks

On the evening of May 15, Beijing time, Federal Reserve Chairman Powell said in a speech at the Thomas Laubach Research Conference held in Washington, DC that long-term interest rates may rise as the economy and policies continue to change.

"Rise real interest rates may also reflect that inflation may be more volatile in the future than the period between the two crises in the 1910s. We may be entering a period of more frequent and possibly longer supply shocks - a difficult challenge for the economy and central banks," Powell said.

He also stressed that it is appropriate to reconsider the average inflation target. Stable inflation expectations are crucial to everything the Fed does. In the huge shock, uncertainty about the inflation outlook must be conveyed.

It is worth mentioning that before this, Powell has repeatedly mentioned that policy changes may put the Fed in a difficult balance between supporting employment and controlling inflation. While Powell did not mention Trump's tariffs in his speech today, he has recently pointed out that tariffs could slow economic growth and drive up inflation.

Powell said the Fed is adjusting its overall policy-making framework to deal with significant changes in inflation and interest rate outlook after the 2020 epidemic.

The Fed adopted its current policy-making framework five years ago and began its assessment this year. The assessment is unlikely to affect how the Fed currently sets interest rates.

Powell said the economic structure will evolve over time, and the strategies, tools and communication methods of monetary policy makers need to evolve accordingly. The challenges brought by the Great Depression are different from those in the period of great inflation and easing, and the two are different from the challenges currently facing. The policy-making framework should be able to adapt to various conditions and needs to be updated regularly as the economy develops.

Latest progress in adjustment

Powell noted, “In the current review, the committee is discussing the lessons we have learned from the experiences of the past five years. We plan to complete a review of specific revisions to the policy development framework in the coming months.”

Powell said he was particularly concerned about the 2020 revisions as the Fed is considering some independent but important updates that reflect the Fed’s understanding of the economy and how the public interprets the revisions.

Powell said that after the 2020 epidemic, the rise in inflation-adjusted "real" interest rates may affect the elements of the Fed's current policy-making framework. Higher real interest rates may reflect the possibility that inflation may be more unstable in the future than during the 21910s crisis.

Powell further stated, “In the discussions so far, participants expressed that they felt it was necessary to rethink the wording of the gap. We will ensure that the new policy-making framework is adapted to a variety of economic environments and developments.”

The 2020 framework focuses the Federal Reserve's employment targets on the so-called "gap" - periods of excessive unemployment. This change actually reduces the Fed's early hikes to cool the labor market and prevent inflationary pressures from arriving.

Powell said that while the policy-making framework must continue to evolve, some of these elements are eternal. After experiencing “big inflation,” policy makers clearly recognize that it is crucial to stabilize inflation expectations at appropriate low levels.

Powell stressed that stabilizing long-term inflation expectations is the driving force for setting a 2% target under the 2012 framework. Maintaining this stable expectation is the main consideration for policy adjustments in 2020. Stabilizing inflation expectations is crucial to everything the Fed does, which is still fully committed to achieving its 2% inflation target today.

Powell said that in addition to revising the policy-making framework, the Fed will also consider improving formal policy communication, especially in terms of forecasts and uncertainties.

Powell said that while academia and market participants generally believe that FOMC (Federal Open Market Committee) communication is effective, there is always room for improvement. In fact, clear communication is a problem even in relatively calm times. A key question is how to promote a broader understanding of the uncertainty facing the economy generally.

Powell also said, “In times of greater impact, more frequent or more dispersed impacts, effective communication needs to convey uncertainty surrounding the Fed’s understanding of the economy and prospects. We will explore how to improve in this regard in the future.”

Prospects for interest rate cuts

As the US CPI data in April continues to cool down, market focus has shifted to whether the Fed will restart interest rate cuts. According to the latest data released, CPI in April increased by 2.3% year-on-year, the lowest level since February 2021; a month-on-month increase of 0.2%, also lower than market expectations.

Against this backdrop, Fed officials have spoken intensively, emphasizing that current policymaking is facing huge uncertainty and may require the maintenance of existing monetary policy for a period of time.

Among them, Mary Daley, chairman of the San Francisco Fed, and Philip Jefferson, vice chairman of the Federal Reserve, both said that under the current economic situation, maintaining monetary policy stability is the key. Although inflation data shows a trend of continuous cooling, the uncertainty brought about by the Trump administration's new round of tariff policies remains high.

Chicago Fed Chairman Austin Goulsby said the Fed's task is to maintain economic stability. It also pointed out that in the uncertain macroeconomic environment, consumers and businesses may tend to reduce spending and investment plans, "It will take some time to show up in actual economic data."

Wall Street analysts generally expect the price uptrend driven by tariff policies to be more obvious in the coming months, which makes the Fed hesitate to cut interest rates.

JPMorgan Chase economist Michael Hansen pointed out that tariffs could lead to surges in U.S. goods prices in June and July, making the Fed more cautious when considering rate cuts. As tariff policies during the Trump administration brought uncertainty and volatility, the Fed is taking a wait-and-see attitude to assess the specific impact of final policy implementation on the economy.

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