On August 22nd of this year, Federal Reserve Chairman Powell delivered his opening speech at the Jackson Hole central bank conference. The first half of his speech, analyzing the current economic situation and hinting at a September interest rate cut, was the focus of market attention. The second half, which introduced the newly revised monetary policy framework, attracted less attention from the market. The Federal Reserve began publicly disclosing its monetary policy goals and framework in 2012, the first year it adopted inflation targeting. The framework is revised every five years, and the current framework is announced annually in the FOMC's (Federal Open Market Committee) annual "Statement on Longer-Run Goals and Monetary Policy." There are two reasons for repeating this announcement annually within the same revision cycle: first, to enhance the Fed's credibility as an institution and to demonstrate its commitment to its original aspirations. The second reason is that this statement is known within the Fed as the "Consensus Statement." All 19 FOMC members (12 of whom vote at each meeting) weigh in on its wording and ultimately agree on it. This consensus on policy objectives and methodology facilitates collective decision-making and strengthens members' self-discipline (after all, they agree on the objectives and methodology). Repeated statements serve as reminders for members. The first paragraph of the 2025 Consensus Statement discusses the Fed's mission and the importance of transparency, continuing the language of the 2024 statement. The second paragraph discusses the economic mechanisms by which inflation and employment deviate from the mandate and the basic policy tools to achieve those objectives. The second paragraph of the 2025 statement contains a significant addition: "The Committee's monetary policy tools are needed to achieve its employment and inflation mandate across a wide range of economic conditions." This paragraph can be seen as a reflection on the 2020 framework. The US economy experienced prolonged low inflation from 2012 to 2019 (core PCE inflation averaged 1.4%), and unemployment remained high until 2016. Consequently, the Federal Reserve was most concerned about the entrenchment of a prolonged low inflation and low interest rate environment, which could lead to an ELB (effective lower bound) problem: a normal policy rate that is too low, leaving little room for rate cuts in the face of an economic downturn. The 2020 policy was designed to address this prevailing environment. After the second half of 2021, the Fed recognized the significant limitations of this overly targeted approach, reacting too slowly to unexpectedly high inflation. This reflection led to the aforementioned changes in the consensus statement. The second paragraph of the 2020 statement devoted considerable space to discussing the decline in the natural rate of interest, the constraints faced by the Federal Reserve at the effective lower bound on interest rates, and the Fed's underlying assessment at the time of increasing downside risks to employment and inflation. By 2025, this discussion was simplified to "If the policy rate faces constraints at the effective lower bound, the Federal Reserve will use all available tools to overcome them." This new version significantly downplays the severity of the ELB. This shift is understandably driven by the high inflation experienced since 2021. The third paragraph focuses on the employment mandate. Both versions acknowledge that "the level of full employment varies depending on many factors, and therefore the Committee does not adopt a fixed target." However, the 2025 version adds the following: "The Committee views maximum employment as the highest level that can be achieved with stable prices." In contrast, the 2020 version does not provide such a clear definition of full employment, but rather more vaguely indicates that it will be assessed using a variety of indicators. Accordingly, the employment target in the 2025 policy statement directly targets full employment and is symmetrical, meaning that monetary policy will need to change regardless of whether actual employment is above or below full employment. In contrast, the 2020 version only responds to shortfalls; if employment levels exceed full employment, monetary policy remains unchanged. This is a significant change, also due to the fact that high inflation in the past few years has exceeded the Fed's expectations. The 2020 version implies that the Fed at the time believed that the Phillips curve was flat, that lower unemployment would not lead to high inflation, and therefore preferred to allow the labor market to "overheat." The Fed implemented this strategy in 2021. Although projected inflation in 2022 put the Fed in a difficult position, this adherence to established rules bolstered the Fed's credibility. This credibility, despite losses in one area, was largely responsible for the soft landing of the US economy between 2022 and 2024. Regarding the price stability mandate, both versions of the statement acknowledged that long-term inflation depends on monetary policy, and therefore the Fed is responsible for price stability. Both versions affirmed a 2% inflation target and emphasized the importance of maintaining 2% long-term inflation expectations. The difference lies in the 2020 statement, which stated, "The Committee aims to achieve an average inflation target of 2%; if actual average inflation falls below 2% for a period, it will seek to achieve inflation above the 2% target in subsequent periods (to compensate for the previous period of low inflation)." The 2025 statement underwent a significant change, with a target of 2% instead of an average of 2%. This change means that if inflation has been below 2% in the past, future policy will not seek higher inflation to "compensate" for it. The discussion of the risk balance remains unchanged in both the new and old versions of the consensus statement. This risk balance methodology was the primary basis for Powell's communication with the market during the September rate cut. Transitioning from the Old to the New Framework: Further Discussion At an internal Federal Reserve seminar in May 2025, Powell reviewed the background to the introduction of the 2020 framework. In addition to the reasons discussed above, he also addressed the role that deepening globalization had played in contributing to low inflation in the United States at the time. The long period of low inflation has had a profound impact on the mindset of Federal Reserve policymakers. At the same symposium, Professor Carl Walsh of the University of California also delivered a keynote speech. He pointed out that another factor contributing to the Fed's 2020 "pro-inflation framework" may be the "mistake" of prematurely raising interest rates in 2015. The rate hike cycle initiated at the end of that year consistently progressed slower than expected, with only one hike in 2015 and 2016, for example. By the end of 2018, facing significant downward economic pressure, the Fed began cutting interest rates in 2019. The advantage of average inflation targeting is that it can raise market inflation expectations while making monetary policy more responsive because it relies on historical average inflation. Monetary policy, by targeting the employment gap, can allow the economy to overheat, thus providing advantages in a low-inflation environment. One shortcoming of the 2020 consensus is that the Fed's commitment to 2% long-term inflation may no longer be credible, as the public may struggle to understand the precise meaning of average inflation. Suppose the current inflation rate is 4%, but the Fed does not tighten monetary policy to compensate for past low inflation. The public might then extrapolate inflation expectations linearly, potentially leading to inflation expectations of 4% or higher, rather than the intended 2%. Furthermore, the average inflation targeting framework is unclear; the Fed does not clearly define whether the average is calculated over a three-, five-, or eight-year window. This difficulty will be addressed by reverting to flexible inflation targeting in the 2025 consensus. The 2020 consensus also lacks a clear definition of full employment, making the mandate unclear. The 2025 consensus clarifies this. Whether new or old, the Federal Reserve's policy framework over the past decade or so has demonstrated the comprehensive application of New Keynesian macroeconomics to monetary policy, and has become increasingly mature. Before Greenspan, the central bank was secretive, observing the entire macroeconomy from a high position and then quietly taking action to regulate the economy. After Greenspan, under the leadership of two leading academic macroeconomists, rational expectations, dynamic equilibrium, and the transparency of policy intentions have become deeply ingrained within the Fed's institutional framework. Looking back, this was a monumental change. Federal Reserve Independence, Transparency, and the Sources of Its Authority Former Chairman Ben Bernanke also participated in the May symposium and delivered a keynote address, discussing the reasons for and specific tools for further enhancing Fed policy transparency. Bernanke suggested that the Federal Reserve's research department publicly release its analysis and forecasts of major possible economic scenarios (risks). He also suggested that the FOMC outline more economic scenarios in various communication tools, explain the monetary policy response for each scenario, and convey greater risk awareness to the public through multi-scenario discussions. Furthermore, Bernanke suggested adding more text to the Summary of Economic Projections (SEP). Interestingly, senior Fed officials almost unanimously opposed this suggestion from the "old boss." Waller refuted this by citing the 2023 Silicon Valley Bank crisis. At the time, the research team and the committee had significant disagreements. Waller pointed out that publishing the researchers' forecasts could undermine the Fed's governance structure (meaning that the researchers would implicitly gain some power over the FOMC). The most interesting scene came during Bernanke's debate with the special commentator. The commentator, a Yale University alumnus, was almost completely opposed to Bernanke's plan. For example, he argued that if the researchers' forecasts diverged significantly from the FOMC's views, he wouldn't know how to explain them to the market. Bernanke quickly retorted, "Unfortunately, that's never happened." The commentator countered that it had happened before: in the mid-1990s, the Fed's research team was concerned about inflation, but Alan Greenspan disagreed, arguing that productivity growth would offset inflationary pressures. Bernanke retorted, "But the entire FOMC was in complete agreement with the research team," then added, "But they were wrong." This last remark, Bernanke's reference to Greenspan's triumphant victory (he defied the odds and didn't raise interest rates, a decision later proven correct), also served as a self-deprecating jab at the FOMC at the time, drawing laughter from the audience (though Bernanke himself remained impassive). Bernanke's call for greater transparency is significant, especially given the current threat to the Federal Reserve's independence. Where expression is free, power comes from the weight of reason. If one's skills are insufficient, one's voice is limited, and therefore power is minimal. During the question-and-answer session at Bernanke's seminar, a branch president without macroeconomic training used a relatively common example to refute Bernanke's argument, but the concept was clearly off-topic and the logic was inconsistent, so Bernanke did not respond. Janet Yellen is a different story. In her early years as a Fed governor, she "pressed" Greenspan in a meeting, asking him: "What is your preferred inflation target? Can you give me a number?" After much hesitation, Greenspan said he felt 2% was appropriate. This exchange is considered a precursor to the Fed's shift to inflation targeting. Yellen was relatively unknown at the time and a Washington novice, but she challenged Greenspan on the strength of her knowledge. Recently, Trump has been constantly inserting his own people into the Federal Reserve, and the Fed's independence seems to be in jeopardy. All FOMC members are required to participate in the "consensus statement," a subtle measure I believe is a crucial part of maintaining the Fed's independence. If a member violates his own consensus statement during a meeting, others will refute him, which is quite humiliating in a group that highly values "intellectual excellence." There are eight FOMC interest rate meetings a year. If you are "insulted" like this every time, it will indeed bring considerable pressure. Institutional economists haven't made many profound discoveries on how institutions work (that is, how to transform them from literal constraints into actual ones). This is largely due to a lack of understanding of Commons' crucial concept that "institutions are collective coercion of individuals." I believe this concept is as crucial to understanding institutions as effective demand is to macroeconomics and liquidity preference to monetary economics: they are invisible and intangible, yet truly and eternally present. I believe the "genetic" mechanisms that make institutions work cannot be found without Commons' insights, for they are essential. For example, the genetic code that makes the Federal Reserve's "consensus statement" effective is this: an FOMC member who abandons the monetary policy consensus statement and only obeys the White House will be easily influenced by other members during debates. "Humiliation" inevitably makes the committee member feel guilty and short-tempered (this stands in stark contrast to Yelp's brazen challenge to Greenspan mentioned above). This is collective coercion of the individual. Thus, the Federal Reserve's independence from the White House (one of its elements) has been put into effect. How collective coercion of the individual is achieved is also a key to understanding the genetic code of power. Mystique is often associated with obscurantism and conservatism, while disenchantment is closely linked to enlightenment and progress. I believe Commons is the one who helps disenchant. When I first read Commons in my youth, I was ecstatic. He expressed something I had always vaguely sensed but couldn't articulate so effortlessly, concisely, and accurately. I still remember laughing so hard that I threw my head back and slapped the railing. Public commitments are constrained, and words are power. Now, with Commons's institutional insights, my confidence in the Federal Reserve's independence has been strengthened, and the theory of a dollar collapse can be dismissed.
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