This year, the U.S. economy has shown resilience against the backdrop of significant adjustments in economic policy. From the perspective of the Federal Reserve's dual mandate (maximum employment and price stability), the labor market remains close to full employment levels, and while inflation is still slightly above target, it has significantly retreated from its post-pandemic peak. Meanwhile, the balance of risks seems to be shifting.

In today's speech, I will first analyze the current economic situation and the short-term outlook for monetary policy, and then focus on the results of the Federal Reserve's second public assessment of its monetary policy framework—this outcome is reflected in the revised "Statement on Longer-Run Goals and Monetary Policy Strategy" that we are releasing today.

Current Economic Situation and Short-Term Monetary Policy Outlook

A year ago, when I stood here, the U.S. economy was at a turning point. At that time, our policy interest rate had been maintained in the range of 5.25%-5.5% for over a year, and this restrictive policy stance was crucial for curbing inflation and promoting a sustainable balance between aggregate demand and supply. Inflation was significantly close to the target, and the labor market had cooled from its previous overheating state, with upward inflation risks diminishing. However, the unemployment rate had risen by nearly 1 percentage point—historically, such a magnitude of unemployment increase typically occurs only during recessions. In the subsequent three Federal Open Market Committee (FOMC) meetings, we readjusted our policy stance, laying the groundwork for the labor market to maintain balance near full employment over the past year.

This year, the economy faces new challenges: significant tariffs imposed on major trading partners are reshaping the global trade system; tightened immigration policies have led to a sudden slowdown in labor force growth; and in the long term, adjustments in tax, spending, and regulatory policies may also have significant impacts on economic growth and productivity. There remains great uncertainty about how these policies will ultimately be implemented and their long-term effects on the economy.

Changes in trade and immigration policies are simultaneously affecting both demand and supply. In this environment, it is difficult to distinguish between cyclical changes and trend (or structural) changes—and this distinction is crucial because monetary policy can be used to stabilize cyclical fluctuations but struggles to alter structural changes.

The labor market is a typical example. The July employment report released earlier this month showed that the average monthly increase in non-farm employment over the past three months was only 35,000, far below the average of 168,000 expected for 2024. Due to significant downward revisions of the preliminary data for May and June, the slowdown in employment growth is more pronounced than assessed a month ago. However, the slowdown in employment growth does not seem to have led to significant labor market slack (which we hope to avoid): the unemployment rate in July, while slightly rising, remains at a historically low level of 4.2%, and has generally remained stable over the past year. Other labor market indicators have also remained largely unchanged or only slightly softened, including the resignation rate, layoff rate, job vacancy-to-unemployed ratio, and nominal wage growth. The simultaneous slowdown in labor supply and demand has significantly reduced the "critical employment increase needed to maintain a stable unemployment rate." In fact, with a sharp decline in immigration, labor force growth has significantly slowed this year, and the labor force participation rate has also slightly decreased in recent months.

Overall, although the labor market appears to be in a balanced state, this balance is quite unique—it stems from significant slowdowns on both the supply and demand sides of the labor market. This abnormal situation suggests that the risks of employment downturn are rising; if these risks materialize, they could quickly manifest in the form of a surge in layoffs and an increase in the unemployment rate.

At the same time, GDP growth significantly slowed to 1.2% in the first half of this year, about half of the expected growth rate of 2.5% for 2024. The slowdown in growth primarily reflects a deceleration in consumer spending. Similar to the labor market, the slowdown in GDP growth may, to some extent, stem from a slowdown in supply (or potential output) growth.

As for inflation, tariffs have begun to push up prices in certain categories of goods. Estimates based on the latest available data show that over the 12 months ending in July, the overall personal consumption expenditures (PCE) price level increased by 2.6%; excluding the more volatile food and energy prices, core PCE prices rose by 2.9%, higher than the same period last year. Specifically, core goods prices increased by 1.1% over the past 12 months, which stands in stark contrast to the moderate decline expected in 2024; in comparison, housing services inflation continues to trend downward, while non-housing services inflation remains slightly above levels consistent with the 2% inflation target historically.

The impact of tariffs on consumer prices has now become clear. We expect this impact to continue to accumulate in the coming months, but the specific timing and magnitude remain highly uncertain. For monetary policy, the key question is: will these price increases significantly raise the risk of persistent inflation? A reasonable baseline assumption is that the impact of tariffs will be relatively short-lived—a one-time change in price levels. Of course, "one-time" does not mean "completed in one go": tariff increases still require time to transmit through supply chains and distribution networks to final prices, and tariff rates are still changing, which may prolong the adjustment process.

However, the upward pressure on prices from tariffs could also trigger more persistent inflation dynamics, which is a risk that needs to be assessed and managed. One possibility is that rising prices lead to a decline in real incomes for workers, prompting them to demand higher wages from employers, resulting in an adverse wage-price spiral. But given that the current labor market is not particularly tight and that downside risks are rising, the likelihood of this scenario seems low.

Another possibility is that inflation expectations rise, thereby pulling actual inflation upward. Although inflation has been above target for four consecutive years and remains a focus for households and businesses, long-term inflation expectation indicators based on market and survey data seem to remain stable, consistent with our 2% long-term inflation target.

Of course, we cannot take for granted that inflation expectations will remain stable. Regardless of what happens, we will not allow a one-time increase in price levels to evolve into a persistent inflation problem.

In summary, what does this mean for monetary policy? In the short term, inflation faces upward risks, while employment faces downward risks—this is a challenging situation. When our dual mandate conflicts, our framework requires us to balance both. The current policy interest rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market indicators allows us to remain cautious when considering adjustments to our policy stance. Nevertheless, given that policy remains in a restrictive range, the baseline outlook and the evolving balance of risks may require us to adjust our policy stance.

Monetary policy does not have a preset path. FOMC members will make decisions entirely based on assessments of the data and its implications for the economic outlook and the balance of risks, and we will never deviate from this principle.

Evolution of the Monetary Policy Framework

Next, I will turn to the second topic: the Federal Reserve's monetary policy framework is built on the statutory mandate given to us by Congress—to promote maximum employment and price stability for the American people. We remain firmly committed to fulfilling this mandate, and the framework revisions will support this mission in a broad economic environment. Our revised "Statement on Longer-Run Goals and Monetary Policy Strategy" (hereinafter referred to as the "Consensus Statement") outlines how we pursue our dual mandate, with the aim of providing the public with a clear understanding of our monetary policy approach—this understanding is crucial for transparency and accountability, and it can enhance the effectiveness of monetary policy.

The adjustments made in this framework assessment are the result of a natural evolution, based on our deepening understanding of the economy. We continue to build on the first consensus statement adopted during Chairman Ben Bernanke's tenure in 2012. The revised statement released today is the result of our second public assessment of the framework, which occurs every five years. This year's assessment includes three components: "Federal Reserve Listens" events held by various regional Federal Reserve Banks, a flagship research conference, and discussions and deliberations among policymakers at FOMC series meetings supported by staff analysis.

In conducting this year's assessment, a core goal was to ensure that our framework can adapt to a wide range of economic environments; at the same time, the framework must evolve with changes in economic structure and our understanding of these changes. The challenges faced during the Great Depression, the Great Inflation, and the Great Moderation were all different, and the challenges we face today are also distinct.

During the last framework assessment, we were in a "new normal": interest rates were near the effective lower bound (ELB), accompanied by low growth, low inflation, and an extremely flat Phillips curve (i.e., inflation was very insensitive to economic slack). For me, a data point that reflects the characteristics of that era is that after the outbreak of the global financial crisis (GFC) at the end of 2008, our policy interest rate remained at the ELB for seven years. Many of you may still remember the sluggish growth and slow recovery of that time—when it was widely believed that even a mild recession would quickly push the policy interest rate back to the ELB, potentially for a long time. If the economy was weak, inflation and inflation expectations could decline, while nominal rates were anchored near zero, leading to rising real rates; higher real rates would further suppress employment growth, exacerbating downward pressure on inflation and inflation expectations, creating an adverse cycle.

The economic environment that previously pushed policy rates to the ELB and prompted the 2020 framework adjustment was thought to stem from slowly changing global factors that could have persisted for a long time—if not for the outbreak of the pandemic. The 2020 Consensus Statement included several elements addressing risks related to the ELB (which have become increasingly prominent over the past two decades): we emphasized the importance of anchoring long-term inflation expectations for achieving price stability and maximum employment; drawing on a wealth of literature on strategies to mitigate ELB risks, we adopted a "flexible average inflation targeting" approach—a "compensatory" strategy to ensure that even under the constraints of the ELB, inflation expectations could remain anchored. Specifically, we stated at that time that if inflation remained below 2%, appropriate monetary policy might push inflation moderately above 2% for a period.

However, the post-pandemic economic reopening did not bring about low inflation and the ELB dilemma; instead, it exposed the global economy to the highest inflation levels in 40 years. Like most other central banks and private sector analysts, we believed until the end of 2021 that there was no need for a significant tightening of policy for inflation to decline relatively quickly. When it became clear that this was not the case, we took strong action: raising the policy interest rate by 5.25 percentage points over 16 months. This action, combined with the easing of supply chain disruptions during the pandemic, pushed inflation significantly closer to the target without the substantial rise in unemployment typically associated with curbing high inflation.

Core Content of the Revised Consensus Statement

This year's assessment considered the evolution of economic conditions over the past five years. During this period, we found that inflation could change rapidly in response to significant shocks; additionally, the current level of interest rates is significantly higher than during the period from the global financial crisis to the pandemic. Currently, inflation is above target, and the policy interest rate is in a restrictive range (which I view as moderately restrictive). We cannot determine at what level long-term rates will ultimately stabilize, but the neutral rate may have risen above the levels of the 2010s—reflecting changes in productivity, demographics, fiscal policy, and other factors affecting the balance of savings and investment. During the assessment, we discussed how the 2020 statement's focus on the ELB complicated our communication in addressing high inflation. We concluded that overemphasizing specific economic environments could lead to confusion, and thus made several important adjustments to the Consensus Statement to reflect this understanding.

First, we removed the statement that "the ELB is a defining feature of the economic landscape," and instead pointed out that "our monetary policy strategy aims to promote maximum employment and price stability across a wide range of economic environments." While the challenges of operating near the ELB remain a potential concern, they are no longer our core focus. The revised statement reaffirms that the Committee is prepared to use all policy tools to achieve the goals of maximum employment and price stability, especially when the federal funds rate is constrained by the ELB.

Second, we are returning to "flexible inflation targeting" and removing the "compensatory" strategy. It has proven that the idea of "intentionally allowing inflation to moderately overshoot" is no longer applicable—as I publicly acknowledged in 2021, the inflation that emerged just months after the adjustment of the 2020 Consensus Statement was neither "intentional" nor "moderate."

Anchoring inflation expectations is crucial for us to suppress inflation without triggering a significant rise in the unemployment rate: when adverse shocks push inflation higher, anchored expectations help bring inflation back to target; when the economy weakens, anchored expectations can limit deflation risks. Additionally, it allows monetary policy to support maximum employment during economic downturns without compromising price stability. The revised statement emphasizes our commitment to taking strong actions to ensure that long-term inflation expectations remain anchored, which benefits both aspects of our dual mandate. The statement also notes that "price stability is essential for a healthy and stable economy and benefits the well-being of all Americans"—a view that was fully reflected in the "Federal Reserve Listens" events. The painful experiences of the past five years remind us that high inflation brings severe difficulties, especially for those least able to bear the rising costs of living.

Third, in the 2020 statement, we used "shortfalls" rather than "deviations" to describe the gap between employment and full employment. The use of "shortfalls" reflects a recognition that there is a high degree of uncertainty in our real-time assessment of the natural level of unemployment (and thus "full employment"). In the later stages of the recovery from the global financial crisis, employment was often above the sustainable level estimated by mainstream estimates, while inflation remained persistently below the 2% target. In the absence of inflationary pressures, if we were to rely solely on uncertain real-time estimates of the natural level of unemployment, there might be no need to tighten policy.

We still hold this view, but the interpretation of the term "shortfalls" does not always align with our intentions, leading to communication challenges—especially since using "shortfalls" does not imply that we are committing to permanently abandon "preventive policies" or ignore tight labor market conditions. Therefore, we have removed the term "shortfalls" from the statement and instead more accurately pointed out that "the Committee recognizes that employment may sometimes be above the real-time assessment level of full employment without necessarily posing a risk to price stability." Of course, if tight labor market conditions or other factors pose a risk to price stability, preventive policies may still be necessary.

The revised statement also notes that full employment is "the highest level of employment that can be sustained over the long term in the context of price stability." The emphasis on a strong labor market highlights the principle that "sustained full employment can create broad economic opportunities and well-being for all Americans"—feedback from the "Federal Reserve Listens" events also confirms the value of a strong labor market for American families, employers, and communities.

Fourth, consistent with the removal of the term "shortfalls," we adjusted the content of the statement to clarify our policy approach when employment and inflation targets conflict: in such cases, we will pursue a balanced approach to advance our dual mandate. The wording of the revised statement is closer to the original 2012 statement, and we will consider the degree of deviation from the targets, as well as the potential time differences for each target to return to levels consistent with our mandate. These principles guide our current policy decisions, as they did during the period from 2022 to 2024—when inflation deviating from the 2% target was our core concern.

In addition to the adjustments mentioned above, the revised statement maintains a high degree of continuity with previous statements: it still articulates our understanding of the mandate given to us by Congress and describes the policy framework we believe is most conducive to promoting maximum employment and price stability; we still believe that monetary policy needs to be forward-looking, considering the time lags in its impact on the economy, and therefore policy actions depend on the economic outlook and the relevant balance of risks; we still believe that setting numerical targets for employment is unwise, as the level of full employment cannot be directly measured and will vary over time due to factors unrelated to monetary policy.

We continue to view a long-term inflation rate of 2% as the level most consistent with our dual mandate goals—we believe that our commitment to this target is a key factor in maintaining the anchoring of long-term inflation expectations. Experience shows that a 2% inflation rate is low enough to ensure that inflation does not affect household and business decisions, while also providing central banks with some policy flexibility to implement easing during economic downturns.

Finally, the revised Consensus Statement retains the commitment to "conduct a public assessment approximately every five years." The five-year cycle is not absolute: this frequency allows policymakers to reassess the structural characteristics of the economy and enables us to engage with the public, practitioners, and scholars about the effectiveness of the framework, while also aligning with practices of several global peers.

Conclusion

In closing, I want to thank Chair Schmid and all the staff—who work diligently every year to host this outstanding event. Including the two online participations during the pandemic, this is my eighth time having the honor of speaking here. Each year, this seminar provides the Federal Reserve leadership with the opportunity to hear the views of top economic thinkers and focus on the challenges we face. Over forty years ago, the Kansas Fed successfully invited former Federal Reserve Chairman Volcker to hold a seminar in this national park, and I am proud to be part of this tradition.

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