Federal Reserve Chair Jerome Powell recently discussed the future trajectory of interest rates and the economic factors influencing these decisions. He emphasized that longer-term interest rates are expected to remain higher as the economy undergoes significant changes, and the Federal Reserve's policy is in a state of flux. Powell's comments were made during the Thomas Laubach Research Conference in Washington, D.C., where he highlighted the evolving economic conditions since the last policy framework review in the summer of 2020. Over the past five years, the U.S. economy has experienced notable shifts, including a surge in inflation that prompted the Fed to implement historically aggressive interest rate hikes. Despite longer-term inflation expectations aligning with the Fed's 2% target, Powell indicated that the era of near-zero interest rates is unlikely to return soon. He pointed out that higher real interest rates might reflect the potential for more volatile inflation in the future, compared to the more stable period of the 2010s. This volatility may be driven by more frequent and persistent supply shocks, posing a challenge for both the economy and central banks. In the aftermath of the 2008 financial crisis, the Federal Reserve kept its benchmark borrowing rate near zero for seven years. However, since December 2024, the overnight lending rate has fluctuated between 4.25% and 4.5%, with a recent rate of 4.33%. Powell's reference to "supply shocks" echoes his recent warnings about the challenges posed by policy changes, which require the Fed to balance support for employment with efforts to control inflation. Although Powell did not specifically mention former President Donald Trump's tariffs in his latest remarks, he has previously acknowledged that such tariffs could slow economic growth and increase inflation. The exact impact of these tariffs remains uncertain, especially as Trump has recently softened his stance, allowing for a 90-day negotiation period. Despite these challenges, the Fed has been cautious in easing its policy following a significant rate cut last year. As part of its ongoing policy framework review, the Fed is developing a five-year plan to guide its decision-making process and enhance how it communicates these decisions to the public. Powell mentioned that this review would consider various factors, including how the Fed communicates its future expectations and how it can adjust its previous review. During the summer of 2020, amid economic turbulence, the Fed introduced a "flexible average inflation target" approach. This strategy allowed inflation to exceed the typical target temporarily to achieve full and inclusive employment. However, the rapid inflation increases following the COVID-19 pandemic forced the Fed to abandon this approach in favor of aggressive rate hikes. The current review will assess how the Fed addresses "shortfalls" in its inflation and employment objectives. Initially, Powell and his colleagues dismissed the inflation surge in 2021 as "transitory," attributing it to pandemic-specific factors. However, several Fed officials later acknowledged that the 2020 framework did not influence their decision to maintain near-zero rates despite rising inflation. Powell mentioned that participants in the ongoing discussions have suggested reconsidering the language surrounding shortfalls and average inflation targeting. The goal is to ensure that the new consensus statement is robust and adaptable to various economic conditions and developments. In addressing potential supply shocks and their policy implications, Powell emphasized the importance of effective communication. Although academics and market participants generally view the Fed's communication as effective, Powell sees room for improvement. He stressed that during periods of larger, more frequent, or disparate shocks, it is crucial to convey the uncertainty surrounding the economic outlook. The Fed aims to enhance its communication strategies as it moves forward with the review. Powell did not specify a completion date for the review but mentioned that it would be concluded in the "coming months." In the previous review, Powell used his annual remarks at the Fed's Jackson Hole retreat to outline the policy changes. In summary, Jerome Powell's recent remarks underscore the Federal Reserve's adaptation to a changing economic landscape. With longer-term interest rates expected to remain elevated, the Fed is grappling with the dual challenges of supporting employment and controlling inflation amid potential supply shocks. The ongoing policy framework review aims to refine the Fed's decision-making process and improve communication with the public, ensuring that its policies remain effective and transparent in a dynamic economic environment.