• Federal Reserve Chair Jerome Powell suggests reconsidering average inflation targeting amid persistent price pressures.
  • The Fed maintains a cautious stance on rate cuts as new tariffs complicate inflation outlook.
  • Powell's upcoming remarks at the Thomas Laubach Research Conference could signal a policy pivot.

Fed rethinks inflation framework

Federal Reserve Chair Jerome Powell has indicated it may be "appropriate to reconsider average inflation targeting," marking a potential turning point in the central bank's monetary policy approach. The comments come as stubborn inflation persists above the Fed's 2% target, driven partly by new tariffs implemented earlier this year.

Powell is expected to elaborate on these views during his May 15 appearance at the Thomas Laubach Research Conference, where economists anticipate he may outline adjustments to the Fed's current framework. The central bank adopted average inflation targeting in 2020 to allow temporary overshoots of its inflation goal, but recent economic conditions have challenged this approach.

Tariffs complicate policy path

The Fed finds itself navigating conflicting economic signals - a historically strong labor market paired with inflation that refuses to cool sufficiently. New tariffs on imported goods, reintroduced by the Trump administration, have added fresh upward pressure on prices just as the Fed appeared to be gaining control over inflation.

"We're seeing the effects of these trade measures flow through to consumer prices," said one Fed official familiar with internal discussions, speaking on condition of anonymity. "It requires us to be particularly data-dependent in our approach."

Market participants now see fewer than two rate cuts as likely in 2025, a sharp reversal from expectations at the start of the year. The next key data point comes June 11 with the release of May's CPI figures, which could determine whether the Fed maintains its current restrictive stance or begins easing policy.

Political pressures mount

The Fed's deliberations occur against a backdrop of increasing political pressure, with the White House pushing for lower rates to sustain economic growth ahead of the 2026 midterm elections. However, Powell has maintained the central bank's independence, emphasizing that policy decisions will remain guided by economic fundamentals rather than political considerations.

Economists warn that abandoning average inflation targeting could signal a more hawkish Fed posture, potentially slowing economic growth. "This would represent a significant shift in how the Fed approaches its inflation mandate," noted Julia Coronado, founder of MacroPolicy Perspectives. "The risk is they overcorrect after having been too slow to respond initially."