I. Policy Shift Following the Jackson Hole Symposium

At the 2025 Jackson Hole Symposium, the Federal Reserve made significant adjustments to its interest rate policy, addressing both the short-term path and the long-term monetary framework. In the short term, Powell explicitly acknowledged that current interest rates are in a restrictive range (above the neutral rate) and are already dampening economic growth, effectively opening the door to a rate cut in September.

The core logic behind this policy shift lies in a change in the Fed’s policy priorities: Over the past two years, high interest rates were maintained to curb high inflation; however, with employment data remaining persistently weak, the policy focus has shifted from controlling inflation to preserving jobs.

II. The Dual Drivers Behind the Rate Cut

Powell’s shift is primarily driven by two factors:

  1. The Fragile Balance in the Labor Market: Powell publicly acknowledged for the first time that the labor market is experiencing a contraction in both supply and demand. The current stable unemployment rate is merely a superficial phenomenon—equivalent to both the numerator and denominator shrinking simultaneously, temporarily keeping the ratio unchanged. Many companies have already frozen hiring, and if large-scale layoffs occur in the future, the unemployment rate will rise rapidly.
  2. A Policy Compromise with Trump: Powell acknowledged for the first time that the impact of tariffs on inflation is one-off, a judgment that cleared the way for his shift toward employment targets. However, this assertion does not align with reality; the current inflationary pressures in the U.S. are a long-term issue, not caused by one-off factors, and the only fundamental solution lies in an economic recession.

III. Major Adjustments to the Long-Term Monetary Framework

The Fed also made two key adjustments to its long-term monetary framework:

  1. Abolishing the Effective Lower Bound (ELB) mechanism, which was originally established as a lower limit to prevent interest rates from falling too low and causing a liquidity trap.
  2. Abolishing the “Make-up Strategy,” which previously allowed inflation to run above target for a period to compensate for past periods when inflation fell short of target.

These two adjustments mean the Fed’s future room for maneuver in monetary policy will expand further, but they also sow the seeds for long-term inflationary instability. A profound contradiction has already emerged between the current demand for short-term rate cuts and long-term high inflationary pressures; whichever direction policy leans, it will face enormous economic risks.