What exactly did Jerome Powell announce in his speech?

Today, Jerome Powell made a big speech announcing an update to the overall framework for monetary policy that the Fed uses to set interest rates.  Here are the highlights.

We continue to believe that specifying a numerical goal for employment is unwise, because the maximum level of employment is not directly measurable and changes over time for reasons unrelated to monetary policy.  - Jerome Powell, speech at Jackson Hole, 8/27/20

This is Powell basically admitting the Fed has no idea what unemployment rate starts causing inflation, which has been true for a very long time. 

In addition, we have not changed our view that a longer-run inflation rate of 2 percent is most consistent with our mandate to promote both maximum employment and price stability.

This means the Fed is not raising their target up from 2% to say 3% or 4%.  I believe the inflation target should remain at 2% and not be raised any higher, which I talk about at greater length in my own policy memo.

Our new statement explicitly acknowledges the challenges posed by the proximity of interest rates to the effective lower bound. By reducing our scope to support the economy by cutting interest rates, the lower bound increases downward risks to employment and inflation. To counter these risks, we are prepared to use our full range of tools to support the economy.

Here Powell admits that sometimes interest rates will hit zero and that the Fed will be forced to engage in extraordinary measures, and the Fed is currently very willing to do exactly that.

With regard to the employment side of our mandate, our revised statement emphasizes that maximum employment is a broad-based and inclusive goal.

This appears to be a shout out to the people advocating to add racial equality explicitly to the Fed mandate.  I think this strikes a nice balance, where it acknowledges the need to consider these impacts more explicitly, without elevating it to a place equal to the legislatively mandated goals of price stability and maximum employment.

In addition, our revised statement says that our policy decision will be informed by our "assessments of the shortfalls of employment from its maximum level" rather than by "deviations from its maximum level" as in our previous statement. This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation.

Powell, in this addition to the framework, appears to be admitting that the Fed will not start trying to reverse an economic expansion simply because unemployment is getting too low and will wait until inflation starts going up until taking those steps. 

To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.

This is also a useful move by Powell, where there is a debate about whether to target the inflation rate or the price level (a topic I address in one of my very first blog posts and in a short paper describing a potential topic for future research).  I say this is basically a false choice (based on insights from the engineering department), where the Fed should primarily target the inflation rate but adjust that target by how much it has missed that target in the past, which means they would be targeting the price level to some degree as well. This is pretty much exactly what Powell announced, so I think this is a good idea as well, and even if it is a modest reform, it does represent an improvement on current policy.

In seeking to achieve inflation that averages 2 percent over time, we are not tying ourselves to a particular mathematical formula that defines the average. Thus, our approach could be viewed as a flexible form of average inflation targeting.

This is Powell admitting that strict mathematical formulas are not going to be used to determine monetary policy at the Fed.  I think this is broadly the right way to go, but I do find formulas useful for guiding policy, even if they should not be adhered to when other factors not in the formula substantially impact the desired course of action.  I will admit that in another policy memo, I suggest the ECB should consider using a QE vs inflation schedule to guide policy in Europe, but do advise that this formula should be revised often as economic conditions adapt over time, so this builds some discretion into the process as well when the need arises. 

In general though, I am thrilled with this revision to the framework for monetary policy used by the Fed.  It avoids increasing the 2% target, but does target an average inflation rate of 2% over time, and leaves it up to the discretion of the policymakers at the Federal Reserve to determine how exactly to do that.  They make other smaller revisions that I think move policy in the right direction and realistically could not have hoped for anything better.  This is just one more example of how Jerome Powell is doing a superb job managing the Federal Reserve in very difficult times.