InflationHeadline PCE inflation rose 2.6% y/y in July; core PCE up 2.9%.Goods prices rose 1.1%, reversing declines from 2024.Housing services inflation continues to trend lower; nonhousing services remain slightly above levels historically consistent with 2%.Tariffs are visibly pushing up prices; effects expected to accumulate in coming months.Base case: tariff-driven price increases are short-lived, one-time shifts.Risks: could create wage–price dynamics or lift inflation expectations, though Powell sees this as unlikely.Commitment: Fed will not allow a one-time price level increase to become ongoing inflation.Longer-term inflation expectations remain well anchored near 2%.Labor MarketPayroll growth slowed to 35,000/month over last 3 months vs. 168,000/month in 2024.Unemployment rate edged up to 4.2%, still historically low.Labor force growth has slowed sharply due to tighter immigration policies.Participation rate edged lower; demand and supply for labor both softened.Labor market appears “in balance,” but this balance reflects slowing on both sides, raising downside risks to employment.Risks: a sudden downturn could trigger rising layoffs and unemployment.Economic GrowthGDP slowed to 1.2% in H1 2025 vs. 2.5% in 2024.Slowdown led mainly by weaker consumer spending.Some slowing reflects supply-side constraints (immigration, tariffs, regulatory and tax policy changes).Balance of risks appears to be shifting toward weaker growth and labor softness.Monetary Policy OutlookCurrent policy stance remains restrictive but is now 100 bps closer to neutral than a year ago.Risks are tilted to the upside for inflation and downside for employment.Framework requires balancing both sides of dual mandate when goals are in tension.Fed will “proceed carefully”, not on a preset course.Decisions will depend on incoming data, risks, and outlook.Fed Policy Framework (Revised Statement)Review conducted every 5 years; 2025 revisions mark the second public review since 2012.Key changes:Removed language making the zero lower bound (ELB) a defining feature.Eliminated “makeup” strategy (flexible average inflation targeting) → returned to flexible inflation targeting.Removed “shortfalls” wording on employment; clarified Fed may not tighten policy solely on uncertain estimates of max employment.New language: employment may at times run above real-time estimates without risks to price stability.If labor tightness threatens inflation, preemptive action is still warranted.Reinforced commitment to:Well-anchored long-term inflation expectations.Balanced approach when inflation and employment goals conflict.2% inflation target as the anchor for price stability.Key Themes & CommitmentsFed remains data-dependent, flexible, and forward-looking.Price stability is essential for economic well-being, especially for vulnerable households.Commitment to review framework every 5 years to adapt to structural changes.Fed will continue to pursue maximum employment and 2% inflation with full transparency and accountability.Elaborating on the framework changes:The Fed’s updated policy framework marks a significant shift away from the 2020 “makeup” strategy and a refocusing on clarity and flexibility. By eliminating the commitment to allow inflation to run moderately above 2% following periods of weakness, the Fed is acknowledging that this approach was both impractical and politically costly, especially after the post-pandemic surge. Returning to a standard flexible inflation targeting regime signals that the Fed intends to avoid locking itself into asymmetric commitments and will instead react to conditions in real time.The removal of language tying policy too closely to the zero lower bound (ELB) also broadens the Fed’s room to maneuver. In the 2010s, the ELB was a defining constraint, but in today’s higher-rate environment, that focus is less relevant. By stepping back, the Fed is making clear that its framework is meant to apply across a wider range of economic conditions, not just prolonged low-rate episodes. This provides greater communication flexibility and reduces confusion about how the Fed will react in periods of elevated inflation or restrictive policy.Perhaps most notable is the adjustment around employment language. The old framework emphasized avoiding “shortfalls” from maximum employment, which often gave the impression that the Fed would tolerate overheated labor markets as long as inflation was subdued. The revised language makes it clear that employment can run above estimates without forcing action, but it also restores the option for preemptive tightening if labor market tightness threatens price stability. This change reinforces the Fed’s dual mandate balance, avoiding the perception that policy is skewed toward jobs at the expense of inflation control.Overall, the implications are that the Fed is recalibrating toward a more balanced, less rigid framework. Policymakers have learned from the past five years that inflation risks can materialize quickly, and that too much emphasis on labor “shortfalls” or ELB-related concerns can undermine credibility. The new approach gives the Fed greater flexibility, clearer communication, and stronger anchoring of inflation expectations, all while keeping the 2% target firmly at the center of its strategy. This article was written by Greg Michalowski at investinglive.com.