The Federal Reserve on Friday officially ended its 2020-era policy that allowed inflation to run above 2 percent, a move intended to restore credibility and simplify its economic framework after years of persistent inflation. The announcement came during Chair Jerome Powell’s speech at the Kansas City Fed’s annual Jackson Hole conference.
The policy, originally designed to support recovery from chronically low inflation, was overtaken by post-pandemic conditions that led to the highest price surges in four decades. Powell admitted that the concept of a deliberate inflation overshoot “proved irrelevant,” signaling a clear retreat from one of the central bank’s most controversial strategies in recent years.
The Fed’s updated policy statement now returns to a traditional 2 percent inflation target without tolerance for temporary overshoots. It also adjusts language around employment, no longer framing deviations from maximum employment as “shortfalls.” Instead, it acknowledges that job growth above perceived sustainable levels does not automatically trigger inflation, allowing more flexibility in labor market responses.
This shift highlights the dramatic reversal in the Fed’s priorities. After years of low inflation and stagnant growth following the 2008 financial crisis, the central bank had focused on stimulus and maximum employment. The pandemic turned that approach upside down, with supply chain breakdowns, aggressive government spending, and stimulus-driven demand fueling prolonged inflation.
Powell emphasized the need to anchor inflation expectations and rebuild public trust. The new statement reinforces that “price stability is essential for a sound and stable economy and supports the well-being of all Americans.”
The policy change concludes the Fed’s second comprehensive review of its monetary framework, a process now scheduled to occur every five years. The updated guidelines aim to better navigate varied economic scenarios and clarify how officials will balance employment and inflation when the two are in conflict.
