Federal Reserve Addresses Economic Shifts and Policy Framework Update

August 23, 2025

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Federal Reserve Addresses Economic Shifts and Policy Framework Update

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Key Economic Developments

Labour market slowdown: Job growth fell to 35,000/month (past 3 months) from 168,000/month in 2024, though unemployment remains low at 4.2%.
GDP growth halved to 1.2% in H1 2025 versus 2.5% in 2024, driven by reduced consumer spending.
Inflation pressures: Core PCE at 2.9% YoY, with goods inflation reversing to +1.1% (from 2024 declines) due to tariff impacts.
Risks: Upside inflation threats (tariff passthrough) versus downside employment risks (labour demand/supply cooldown).

Monetary Policy Stance

Policy rate now 100bps closer to neutral than 2023, allowing careful calibration amid restrictive territory.
Framework prioritises balancing dual mandate (employment/inflation) without pre-set courses; decisions remain data-dependent.
Fed will not tolerate one-off price surges becoming entrenched inflation, citing anchored long-term expectations.

Policy Framework Revisions

ELB focus removed: No longer treats effective lower bound as defining landscape, emphasising adaptability across economic conditions.
Flexible inflation targeting reinstated: Abandons “makeup strategy” (moderate overshoots) after post-pandemic inflation surge.
“Shortfalls” language retired: Clarifies Fed may allow employment above estimated maximum if inflation risks are absent.
Five-year review cycle retained: Ensures framework evolves with structural economic changes.

Tariffs and immigration policies are reshaping supply/demand dynamics, complicating cyclical/structural distinction. The Fed notes labour market balance stems from simultaneous cooling of worker supply and demand, increasing vulnerability to abrupt unemployment spikes.

Implications for Investors

Monitor tariff passthrough timelines: Goods inflation likely to accumulate but may prove transient if wage spirals remain contained.
Labour market vigilance: Rapid deterioration possible despite current stability; watch layoff data and participation rates.
Framework clarity: Revised strategy emphasises pre-emptive action if labour tightness threatens price stability, reducing ambiguity.

“It is always necessary to jump up and down on the scaffold of knowledge to make sure it is solid .” – David Sloan Wilson

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