Jerome Powell finally had to face the music on the Federal Reserve’s biggest policy blunder in decades.
The admission left economists and market watchers stunned.
And Jerome Powell made one stunning admission about inflation that has Wall Street on edge.
Powell admits Federal Reserve’s inflation targeting strategy failed
Federal Reserve Chairman Jerome Powell made a bombshell confession during his opening remarks at the Second Thomas Laubach Research Conference in Washington, D.C. on Thursday.
The Fed’s much-touted 2020 policy framework – which was supposed to allow inflation to run "moderately above 2 percent for some time" – proved completely useless when real inflation exploded just months after its adoption.
"The idea of an intentional, moderate overshoot proved irrelevant to our policy discussions and has remained so through today," Powell admitted. "There was nothing intentional or moderate about the inflation that arrived a few months after we announced our changes to the consensus statement."
This stunning acknowledgment comes as the Federal Reserve conducts its second formal review of its monetary policy framework since 2020. Powell’s remarks signal a major reversal of a policy that failed spectacularly when put to the test.
Powell confesses inflation was far worse than expected
The Fed Chair’s candid assessment continued as he acknowledged how badly the central bank missed the inflation surge that began in 2021.
"Through the end of 2021, FOMC participants continued to forecast that inflation was likely to subside fairly quickly in 2022, with only a moderate increase in our policy rate," Powell explained.
That forecast – which aligned with predictions from most major central banks and analysts – turned out to be catastrophically wrong. Instead of "subsiding fairly quickly," inflation skyrocketed to a 40-year high of 7.2 percent, forcing the Fed to hike rates an aggressive 525 basis points in just 16 months.
Powell’s confession exposes the failure of the Fed’s complex economic models and forward guidance, which left American families blindsided by the worst inflation crisis since the Carter administration.
Fed scrapping its "average inflation targeting" approach
The Federal Reserve is now quietly abandoning key elements of its 2020 framework that proved ineffective when inflation surged.
At last week’s FOMC meeting, Powell revealed that committee members agreed it would be "appropriate to reconsider the language around shortfalls" and took a "similar take on average inflation targeting."
This represents a stunning about-face from the Fed’s much-hyped 2020 framework that promised to make up for periods of low inflation by allowing inflation to run hot for a while – a policy that critics warned could lead to precisely the inflation disaster that occurred.
Powell’s confession comes as the Fed reports inflation has finally returned to near its 2% target, with the latest PCE inflation reading at 2.2% for April. However, that disinflation came at the cost of keeping interest rates at their highest level in over two decades.
Danger signs ahead as Powell warns of more volatility
In perhaps his most concerning remarks, Powell suggested Americans should brace for more economic turbulence ahead.
"Higher real rates may also reflect the possibility that inflation could be more volatile going forward than in the inter-crisis period of the 2010s," Powell warned. "We may be entering a period of more frequent, and potentially more persistent, supply shocks—a difficult challenge for the economy and for central banks."
This ominous warning suggests the Fed is preparing for a future of unpredictable inflation spikes and economic disruptions that could repeatedly force the central bank into aggressive action.
Even more concerning, Powell noted that despite the Fed’s policy rate currently sitting well above the zero lower bound, the central bank typically cuts rates by about 500 basis points during recessions – a move that could quickly push rates back to zero in the next economic downturn.
Fed scrambling to fix broken framework
The Fed Chair made it clear the central bank is now in damage control mode, working to revamp its failed framework before the next crisis hits.
"We plan to complete consideration of specific changes to the consensus statement in coming months," Powell stated. "We will ensure that our new consensus statement is robust to a wide range of economic environments and developments."
This urgent reassessment comes as the Fed faces mounting criticism for its role in creating the inflation crisis through its 2020-2021 policies of near-zero interest rates and massive quantitative easing, even as inflation was already beginning to surge.
The central bank now finds itself in the awkward position of having to overhaul the very framework it proudly unveiled just five years ago – a framework that collapsed almost immediately when confronted with real-world economic pressures.
Powell’s comments mark a rare moment of humility from the central bank, which typically portrays its policies as carefully calibrated and forward-looking. The tacit admission that its entire framework needed to be scrapped after just five years speaks volumes about the magnitude of the Fed’s policy failure.