Federal Reserve Chair Jerome Powell on Thursday warned that longer-term interest rates will likely remain higher amid economic and policy shifts. He spoke at the Thomas Laubach Research Conference in Washington, D.C., highlighting how economic conditions have shifted dramatically in the past five years.
“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,” he stated.
The shocks could lead to more volatile inflation, contrasting with the relative price stability of the 2010s.
The Fed’s current benchmark interest rate stands between 4.25% and 4.5%, up significantly from near-zero levels post the financial crisis of 2008. Despite the Fed slashing rates by a whole percentage point last year, the Fed has taken a cautious approach and held off on further cuts this year. While Powell did not directly mention President Trump’s tariffs and trade policy, he has recently acknowledged that they could spike inflation and slow the economy’s growth.
The Federal Reserve is conducting its first major policy framework review since 2020. The review will evaluate how the Fed communicates expectations, whether it should reconsider its approach to “shortfalls” in inflation and employment goals, and the relevance and future of the “flexible average inflation target” introduced in 2020.
Powell acknowledged that in 2021, Fed officials underestimated inflation by calling it “transitionary” post-pandemic. However, the 2020 framework did not significantly influence rate decisions during the early inflation surge, suggesting communication and execution gaps.
Powell emphasized a need for clearer and improved communication, especially amid complex or unexpected economic development. The revised framework is expected to be finalized in the coming months. However, Powell did not provide a specific timeline.
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