Federal Reserve Chair Jerome Powell said Thursday that the central bank is rethinking its approach to inflation and employment, signaling possible changes to the Fed's policy strategy as part of a major review underway in 2025.

“Participants have indicated that they thought it would be appropriate to reconsider the language around [labor market] shortfalls,” Powell said, referring to how the Fed talks about employment in its official strategy.

Powell also highlighted that “at our meeting last week, we had a similar take on average inflation targeting,” hinting that the policy introduced in 2020 may be revised or dropped.

What's Changing And Why?

In 2020, the Fed adopted a strategy to let inflation run slightly above 2% after years of staying too low. That policy, known as average inflation targeting, was meant to boost job growth and better support the economy in downturns.

But just months later, inflation surged far beyond the Fed's expectations, hitting a peak of 7.2% in 2022. The Fed had to respond aggressively, raising interest rates by 5.25 percentage points in just 16 months. Now, Powell says the economic landscape has changed and the old approach may no longer fit.

In April 2025, inflation measured by the Fed's preferred gauge—the personal consumption expenditures index—was down to 2.2%.

That's close to the Fed's goal and, Powell noted, "without the sharp increase in unemployment" that often comes with rate hikes. This success may be pushing the Fed to rethink whether it still needs the average inflation policy.

Better Communication In Focus

Powell also acknowledged that the Fed needs to do a better job explaining its outlook and the risks it sees. He said the central bank is looking at ways to improve how it communicates uncertainty around economic forecasts.

"Clear communication is an issue even in relatively placid times," he said. He added that in today's more volatile world—where shocks happen more often—it’s even more important to help the public understand that forecasts can change.

What Happens Next?

Powell said the Fed will finish its policy review in the coming months. The updated strategy will replace the one adopted in 2020 and is expected to shape how the Fed responds to future economic challenges.

While some core elements will stay—like the 2% inflation target—others, like the language around employment and inflation overshooting, may be rewritten.

For now, Powell made it clear that anchoring inflation expectations—keeping public confidence that prices will remain stable—is still the Fed's top priority. "We remain fully committed to the 2 percent target today," he said.

Market Reactions: Dollar Rebounds, Yields Hover Near 5% After Powell Speech

Markets showed a mixed response to Powell's comments, with the U.S. dollar bouncing back while Treasury yields remained elevated and tech stocks took a breather.

The U.S. Dollar Index, as tracked by the Invesco DB USD Index Bullish Fund ETF , rose to 100.8, trimming earlier losses triggered by weaker-than-expected retail and producer price data released earlier in the day.

Meanwhile, 30-year Treasury yields briefly touched the 5% threshold, reflecting market expectations that interest rates will remain elevated. Yields later eased slightly to 4.98% as investors digested Powell's remarks on the Fed's evolving policy stance.

Nasdaq 100 futures were flat, stabilizing after a three-day winning streak, as traders weighed the potential implications of a policy framework revision and a slower-than-expected inflation path.

Traders currently assign just an 8% probability of a 25-basis-point rate cut at the June FOMC meeting, according to CME FedWatch Tool data. The likelihood of easing increases further out, with markets fully pricing in a rate cut by September 2025.

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Image created using artificial intelligence via Midjourney.