Today, all focus is on Powell’s Jackson Hole speech, where traders will look for hints about the future direction of monetary policy. The Jackson Hole Economic Policy Symposium has often marked major policy framework shifts and signals of immediate policy changes. Today it may be no different, with one key factor in the background: the heavy pressure on the independence of the Federal Reserve. 

(Core PCE) 

From the 2008 financial crisis to the Covid-19 shock, US core inflation remained subdued, well below the 2% target, despite ultra-low rates and massive quantitative easing. The average core PCE over this period was 1.52%, with only a few months above 2% in the entire 12-year span. With Covid, that low-inflation era came to an end. Supply chain bottlenecks, changes in consumer behavior, enormous government spending to counter the slowdown, labor market imbalances, energy shocks from the Ukraine–Russia war, and more QE all combined to create the biggest global inflation surge in decades for an average of 3.43% for US. In the US, the divergence was sharper due to much larger fiscal spending under both Trump and Biden. The economy recovered more quickly, but inflation proved stickier. As inflation falling towards 2%, tariff effects then stalled the disinflation process. 

After Covid, the Federal Reserve changed its framework and introduced FAIT (Flexible Average Inflation Targeting). Under FAIT, the Fed no longer forced inflation back to 2% quickly but allowed overshooting to compensate for the 2008–2020 period of below-target inflation, giving more weight to fixing labor market problems. However, as seen in the data, the 3.43% average core inflation of the past five years risks unsettling long-term inflation expectations and increasing the chance that higher inflation becomes anchored. 

What is Expected in Powell’s Jackson Hole Speech? 

Powell has been working on policy framework changes for some time and looking at the last two years of Fed decisions, the central bank has already started to move away from FAIT. Today, Powell is expected to revert from FAIT back to the previous standard of flexible inflation targeting. This would signal greater emphasis on price stability, unless the labor market suffers a sharp downturn. Powell may also announce steps to improve transparency. 

Markets might initially see this shift away from FAIT as hawkish, but in reality the Fed has already been moving in that direction for some time, at least in its decisions if not its language. Much of the market impact may already be priced in. 

As for short-term policy, the September meeting will be crucial. Just days ago, markets were considering the possibility of a surprise 50-basis-point cut. After hot inflation data and strong PMI readings, even a 25-basis-point cut is priced at only 73%. If not for large payrolls revisions, the chance of a cut would be far lower, but the revisions have changed the outlook. Still, key data is due before September, including PCE, CPI, and the payrolls report. Powell may avoid giving a clear signal today and instead keep the option of a September cut open if conditions warrant. 

How Might Markets React to Powell? 

Reverting from FAIT is inherently hawkish, but markets may have priced in some of the effect already. Still, it remains broadly dollar-positive. The key will be how seriously Powell addresses weakness in the jobs market. If he does not see labor conditions as deteriorating meaningfully, the Fed has little reason to cut rates while both goods and services inflation are still picking up, even though shelter inflation is easing. 

If markets interpret Powell’s view on jobs and the framework change as not hawkish enough, profit-taking among dollar bulls could emerge. However, if Powell signals that recent job weakness is just one or two data points and the Fed remains in a good place, the message would be that no urgent changes are needed and it will be dollar positive.