The US Federal Open Market Committee (FOMC) Statement on Longer-Run Goals and Monetary Policy Strategy Adopted effective January 24, 2012; as amended effective August 22, 2025
The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisions making by households and businesses,
reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.The Committee’s monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions. Employment, inflation, and long-term interest
rates fluctuate over time in response to economic and financial disturbances. Monetary policy plays an important role in stabilizing the economy in response to these disturbances. The Committee’s primary means of adjusting the stance of monetary policy is through changes in the target range for the federal funds rate. The Committee is prepared to use its full range of tools to achieve its maximum employment and price stability goals, particularly if the federal funds rate is constrained by its effective lower bound.Durably achieving maximum employment fosters broad-based economic opportunities and benefits for all Americans. The Committee views maximum employment as the highest level of employment that can be achieved on a sustained basis in a context of price stability. The maximum level of employment is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Price stability is essential for a sound and stable economy and supports the well-being of all Americans. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee can specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory maximum employment and price stability mandates. The Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee’s ability to promote maximum employment in the face of significant economic disturbances. The Committee is prepared to act forcefully to ensure that longer-term inflation expectations remain well anchored.
Monetary policy actions tend to influence economic activity, employment, and prices with a lag. Moreover, sustainably achieving maximum employment and price stability depends on a stable financial system. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee’s goals.The Committee’s employment and inflation objectives are generally complementary. However, if the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the extent of departures from its goals and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. The Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability.The Committee intends to review these principles and to make adjustments as appropriate at its annual organizational meeting each January, and to undertake roughly every 5 years a thorough public review of its monetary policy strategy, tools, and communication practices.
Analysis - of above Federal Open Market Committee (FOMC) Statement on Longer-Run Goals and Monetary Policy Strategy Adopted effective January 24, 2012; as amended effective August 22, 2025
Overview of Key Changes in the 2025 Amendment
The Federal Open Market Committee's (FOMC) Statement on Longer-Run Goals and Monetary Policy Strategy was amended effective August 22, 2025, following a comprehensive review that incorporated lessons from recent economic conditions, including periods of high inflation and elevated interest rates. This update refines the framework originally adopted in 2012 and significantly revised in 2020, shifting back toward a more traditional, symmetric approach to the dual mandate of maximum employment and price stability. The changes emphasize a balanced response to deviations from both goals, remove asymmetric elements favoring employment shortfalls and inflation makeup strategies, and adapt to an economy perceived as more resilient to higher interest rates. While the core goals remain unchanged—promoting maximum employment, stable prices (targeted at 2% inflation via PCE), and moderate long-term interest rates—the revisions have notable implications for how the Fed adjusts interest rates in response to economic disturbances.
Changes Related to Inflation Targeting and Interest Rates
The most significant shift is the elimination of the 2020 "flexible average inflation targeting" (FAIT) approach, which allowed for deliberate inflation overshoots above 2% to compensate for prior undershoots. The new statement reverts to a stricter focus on achieving inflation "at the rate of 2 percent" over the longer run, without the makeup mechanism. It stresses the need to "act forcefully" to anchor longer-term inflation expectations at 2%, as this fosters price stability and moderate long-term interest rates.
This change implies a lower tolerance for persistent inflation above 2%, potentially leading to quicker interest rate hikes or prolonged higher rates when inflation risks emerge, rather than allowing temporary overshoots to average out. For example, in scenarios like the post-COVID inflation surge, the Fed might now respond more aggressively with rate increases to prevent expectations from de-anchoring, reducing the likelihood of extended accommodative policy.
The statement retains the 2% target as "most consistent" with the mandate but removes language from the prior version about downward risks to inflation and employment due to the federal funds rate being frequently constrained by its effective lower bound (ELB). This omission signals that the Fed no longer views the neutral interest rate as persistently low, reflecting recent experiences where rates rose above 5% without derailing growth. As a result, the framework assumes a broader operational range for rates, making it easier to use conventional rate adjustments (via the federal funds target range) as the primary tool for stabilizing the economy. The Fed remains prepared to deploy its "full range of tools"—such as quantitative easing or forward guidance—if rates hit the ELB, but the update suggests less preemptive concern about this constraint, potentially allowing for higher average rates over time.
Changes Related to Employment Goals and Interest Rates
The amendment symmetrizes the approach to employment by dropping references to "shortfalls" from maximum employment, instead focusing on "assessments of the maximum level of employment." Maximum employment is now explicitly defined as "the highest level of employment that can be achieved on a sustained basis in a context of price stability," emphasizing broad-based benefits for all Americans. A new addition acknowledges that "employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability," drawing from recent data where low unemployment coexisted with declining inflation. This provides flexibility to keep rates lower for longer in a strong labor market, as long as inflation remains controlled, reducing the urge to hike preemptively based solely on tight employment metrics.
However, when employment and inflation goals conflict (e.g., high inflation alongside low unemployment), the statement mandates a "balanced approach," considering the magnitude and duration of deviations from both objectives. This replaces the prior bias toward mitigating employment shortfalls, potentially leading to tighter policy—such as rate hikes—even in robust job markets if inflation pressures build. Analysts interpret this as a hawkish tilt, where the Fed might sustain higher rates to prioritize price stability, though it could delay cuts if employment risks rise.
Broader Implications for Interest Rate Changes
Overall, the revisions position the framework on a "more traditional footing," enhancing robustness across diverse economic conditions, including higher-rate environments. From an interest rate perspective:
Short-term: The changes align with recent signals of potential rate cuts if inflation continues cooling and employment softens, as the balanced approach allows responsiveness to downside risks.However, without FAIT, any inflation rebound could prompt rapid reversals to hikes.
Medium- to Long-term: By removing low-rate assumptions and makeup strategies, the Fed may maintain a higher neutral rate path, leading to elevated borrowing costs over cycles to anchor inflation expectations. This could moderate long-term interest rates by enhancing credibility but might result in "higher for longer" policy during inflationary periods.
Risk Management: Policy decisions will continue to incorporate lags, medium-term outlooks, and financial system risks, with the federal funds rate as the main lever. This forward-looking stance could amplify rate volatility in response to disturbances but improves transparency for markets.
The FOMC plans annual reviews and thorough public assessments every five years, ensuring adaptability. These updates reflect post-2020 lessons, where the prior framework was tested by unforeseen shocks, and aim to better equip the Fed for symmetric risks in a normalized rate environment.
What in the US FOMC STATEMENT of 22 August 2025 signal rate cut expectations?
The Federal Open Market Committee (FOMC) statement from August 22, 2025, itself does not explicitly signal expectations of a rate cut, as it primarily focuses on updates to the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy, emphasizing the dual mandate of maximum employment and stable prices without addressing immediate policy actions like rate cuts. However, Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Economic Symposium on the same day, which often accompanies FOMC- related discussions, provides critical context for interpreting market expectations of a rate cut. Below are key elements from Powell’s speech and related sources that signal expectations of a rate cut, particularly for the September 2025 FOMC meeting:
Powell’s Acknowledgment of Shifting Risks:
In his Jackson Hole speech, Powell stated, “The stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance,” and noted that “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” This language suggests openness to easing monetary policy, interpreted by markets as a signal for a potential rate cut, with a 25-basis-point reduction widely anticipated for September.
Weakening Labor Market Concerns:
Powell highlighted rising downside risks to employment, particularly after the July 2025 jobs report showed weak job growth (73,000 jobs added, with significant downward revisions for May and June) and an unemployment rate of 4.2%. He noted that “downside risks to employment had meaningfully increased,” which aligns with the Fed’s dual mandate to support employment, thus supporting expectations for a rate cut to stimulate the economy.
Market Reactions and Expectations:
Following Powell’s speech, market indices like the Dow Jones Industrial Average (+1.9%), S&P 500 (+1.5%), and Nasdaq (+2%) surged, reflecting investor optimism about a potential rate cut. The CME Fed watch tool indicated a 91.3% probability of a 25-basis-point rate cut in September, with odds surging after Powell’s remarks. Posts on X also noted the market’s interpretation of Powell’s comments as dovish, reinforcing expectations of a September cut.
Tariff Effects as Temporary: Powell suggested that tariff-induced inflation, driven by President Trump’s trade policies, is likely a “one-time shift in the price level” rather than a persistent issue, reducing concerns that inflation would prevent rate cuts. This view mitigates inflation risks, making a rate cut more feasible.
Dissent Within the FOMC: The minutes from the July 2025 FOMC meeting revealed that Governors Michelle Bowman and Christopher Waller dissented, advocating for a 25-basis-point rate cut due to concerns about a weakening labor market. This rare dissent (the first dual dissent in over 30 years) signals internal support for easing policy, aligning with market expectations for a September cut.
Economic Data and Policy Framework:
While the FOMC statement itself focused on long-term strategy, Powell’s speech and the broader context suggest the Fed is responding to recent economic data, such as slowing job growth and stable but above-target inflation (around 3%). His indication that the Fed might adjust its policy stance to address labor market risks, without committing to aggressive easing, supports a cautious but likely rate cut.
In summary, while the August 22 FOMC statement itself is silent on immediate rate actions, Powell’s Jackson Hole speech on the same day, combined with market reactions, recent economic data, and internal FOMC dissent, strongly signals expectations for a 25-basis-point rate cut at the September 16–17, 2025, meeting. The Fed’s focus on a weakening labor market and the temporary nature of tariff-driven inflation underpins this expectation, though Powell emphasized a data-dependent approach, meaning upcoming inflation and jobs reports will be critical.
How markets reacted?
The financial markets reacted strongly to Federal Reserve Chair Jerome Powell’s Jackson Hole speech on August 22, 2025, which signaled a potential rate cut in September. Below is a summary of the market reactions based on available data:
Equity Markets:
U.S. Indices: The Dow Jones Industrial Average surged by approximately 1.9% (around 800 points), the S&P 500 rose by 1.5%, and the Nasdaq Composite gained 2% on August 22, following Powell’s speech. These gains reflect investor optimism about a potential 25-basis-point rate cut, as Powell’s dovish tone suggested the Fed was leaning toward easing monetary policy to support a weakening labor market.
Sector Performance: Small-cap stocks, which are particularly sensitive to interest rate changes, outperformed, with the Russell 2000 index climbing 3.2%. Rate-sensitive sectors like technology and consumer discretionary also saw significant gains, with companies such as Nvidia, Tesla, and Amazon rising between 3.7% and 4.8%.
Global Markets: The positive sentiment spilled over globally. In Europe, the Stoxx 600 index gained 1%, and Asian markets, including Japan’s Nikkei 225 (+2%) and Hong Kong’s Hang Seng (+1.5%), also rose, as investors anticipated a more accommodative U.S. monetary policy.
Bond Markets:
Treasury Yields: The yield on the 10-year U.S. Treasury note fell slightly to around 3.8%, down from recent highs, as expectations of a rate cut reduced pressure on yields. Investors shifted toward anticipating looser policy, which typically lowers yields on longer-dated bonds.
Market Expectations: The CME Fed watch tool showed a 91.3% probability of a 25-basis-point rate cut at the September 16–17, 2025, FOMC meeting, up from 65% a week earlier, with some pricing in a smaller chance (8.7%) of a 50-basis-point cut. This shift reflects market confidence in Powell’s remarks about adjusting policy to address labor market risks.
Currency Markets:
U.S. Dollar: The U.S. dollar weakened against major currencies, with the DXY index dropping 0.7% on August 22. A dovish Fed typically reduces demand for the dollar, as lower interest rates make U.S. assets less attractive. The euro and yen gained 0.5% and 0.8%, respectively, against the dollar.
Emerging Market Currencies: Currencies like the Mexican peso and Australian dollar also strengthened, as a weaker dollar and expectations of lower U.S. rates supported riskier assets.
Commodities:
Gold: Gold prices rose by 1.2% to around $2,510 per ounce, as a weaker dollar and lower yield expectations boosted demand for the safe-haven asset.
Oil: Crude oil prices saw modest gains, with WTI crude up 0.8% to $75.50 per barrel, supported by positive market sentiment and expectations of economic stimulus from a potential rate cut.
Cryptocurrencies:
Bitcoin and Ethereum: Bitcoin surged 4.5% to above $62,000, and Ethereum gained 5.2%, reflecting a broader risk-on sentiment in markets. Cryptocurrencies often rally when monetary policy expectations turn dovish, as seen with Powell’s comments.
Market Sentiment on X:
Posts on X highlighted the market’s interpretation of Powell’s speech as a clear signal for a September rate cut. Users noted the surge in stock indices and the dollar’s decline, with some speculating on the size of the cut (25 or 50 basis points). Sentiment on X was broadly bullish, with discussions focusing on the Fed’s shift toward prioritizing employment over inflation concerns.
In summary, markets reacted with a strong risk-on rally, driven by Powell’s dovish comments at Jackson Hole on August 22, 2025, which reinforced expectations of a 25-basis-point rate cut in September. Equities, particularly small-caps and tech, surged, Treasury yields dipped, the dollar weakened, and commodities like gold and oil gained. The market’s response reflects confidence in a more accommodative Fed policy, though investors remain attentive to upcoming economic data, such as inflation and jobs reports, which could influence the size and timing of the cut.
How markets may react tomorrow in INDIA?
Expected Reaction of Indian Stock Markets on August 25, 2025
The Indian stock markets (Nifty 50 and Sensex) are likely to open higher on Monday, August 25, 2025, buoyed by positive global cues from Federal Reserve Chair Jerome Powell's dovish speech at the Jackson Hole Symposium on August 22, which signaled imminent US interest rate cuts. This could temporarily alleviate some pressure from Foreign Institutional Investors' (FIIs) bearish bias, as a softer US dollar and lower yields might encourage FII inflows into emerging markets like India. However, gains may be capped or reversed due to persistent FII selling (net outflows of ₹25,564 crore in August so far) and high short positions (around 90% in index futures), leading to a volatile, range-bound session with potential profit booking. Analysts anticipate a "buy on dips" strategy, but caution that without sustained FII buying, the market could remain sideways to bearish in the short term.
Key Influencing Factors:
Powell's Speech and Global Cues: Powell's comments on shifting risks toward employment and openness to policy easing boosted US markets (S&P 500 +1.5%, Nasdaq +2% on Aug 22), raising odds of a September rate cut to over 90%. This dovish tone is expected to spill over positively to Indian equities, potentially reviving FII interest as a weaker dollar reduces outflow pressures. Asian peers (Nikkei +0.15%, Hang Seng +0.40%) also opened firm, supporting an upbeat start for Nifty. However, if upcoming US data (like GDP or jobs reports) tempers rate cut expectations, sentiment could sour.
FII Bearish Bias and Selling Pressure:
FIIs remain net sellers, offloading ₹1,622 crore on August 22 alone, with total August outflows at ₹25,564 crore (and ₹1,57,440 crore for 2025 year-to-date). Their 90% short positions in index futures indicate caution, driven by global tariff concerns (e.g., potential US hikes on Indian exports) and overvaluation worries. While DIIs (Domestic Institutional Investors) have countered with ₹2,546 crore inflows on Aug 22, persistent FII outflows could drag indices if they resume selling post-opening gains.X sentiments echo this, with users noting FII shorts as a key drag but hoping rate cuts might prompt short covering.
Technical Outlook:
Nifty 50: Closed at 24,870 on Aug 22 after a 214-point drop, snapping a 6-day rally. Immediate resistance at 25,000–25,050; a break above could target 25,150–25,500. Support at 24,702–24,852 (near 21-DMA at 24,747); a breach might lead to 24,475–24,336. PCR at 0.62 suggests bearish undertones, but put writing at 25,000 indicates some upside potential if global cues hold.
Bank Nifty: Underperformed on Aug 22 (down 606 points to 55,149). Resistance at 55,800–56,100; support at 55,300–55,000. Banking stocks may see selective buying if rate cuts boost liquidity.
Overall bias: Cautiously optimistic opening (up 0.5–1%), but volatility likely (India VIX up 3% to 11.72). Midcaps and smallcaps may outperform if sentiment improves.
Other Triggers:
Short Week Ahead: Markets closed on August 27 for Ganesh Chaturthi, potentially leading to low volumes and quick reversals. Reliance AGM on August 29 could influence sentiment later in the week.
Sectoral Expectations:
Rate-sensitive sectors like IT, autos (e.g., M&M, Maruti), and realty may gain on Fed hopes. Defensives (pharma, media) could hold firm, while metals and FMCG face profit booking. Avoid capital market stocks (e.g., BSE, Angel One) amid SEBI's derivative expiry talks.
Broader Sentiment:
GST reform buzz provided recent support, but US tariff threats (e.g., doubling on India from Aug 27) add downside risks.
In summary, expect a gap-up opening for Nifty (potentially testing 25,000) driven by Fed optimism, but FII bearishness could limit upside to 0.5–1% gains or trigger intraday selling. Monitor GIFT Nifty (down 65 points pre-Powell but likely to recover) and Asian markets for early signals. The reaction will be data-dependent, with upcoming US GDP data and Indian Q1 GDP (due later) as next catalysts. Investors should focus on dips near supports for entry, but remain cautious amid high FII shorts.
Anish Jagdish Parashar
Indirect tax india online research
Disclaimer:Content reflects author's views for investment decisions and trading proposes consult your financial advisor.
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