Edward Quince’s Wisdom Bites: When the Rules Don't Work—The Fed's Search for a New Playbook

Central bankers love rules. A predictable rule, like the Taylor Rule, offers a way to commit to future actions, manage expectations, and build credibility. But what happens when the economic game changes so much that the old rules no longer apply? We're seeing that dilemma play out at the Federal Reserve right now.

In his August 2025 Jackson Hole speech, Fed Chair Jerome Powell acknowledged that the Fed’s framework, including Flexible Average Inflation Targeting (FAIT), might not be working effectively in a world of frequent supply shocks. He announced the framework would be revised. This is a significant admission. The 2020 framework was built for a "new normal" of low inflation and low rates, where the primary risk was hitting the zero lower bound (ELB). The post-pandemic world delivered the opposite: the highest inflation in 40 years. The Fed has since abandoned its "makeup" strategy and returned to flexible inflation targeting.

This search for a new playbook highlights a deeper challenge: the core models that guide policy are under strain. Economist John Cochrane argues that in standard New Keynesian models, higher interest rates alone don’t lower inflation without a corresponding fiscal tightening. Other economists point to the difficulty in estimating key variables like the neutral rate of interest, or "r-star," which some argue is a "blurry guidepost" for policy. With so much uncertainty, even Fed Governor Christopher Waller has acknowledged that different policy rules can suggest wildly different paths for interest rates.

The Takeaway: We are in an era where central bank playbooks are being rewritten in real-time. The old certainties about how inflation, employment, and interest rates interact are being tested by new structural realities like shifting supply chains, fiscal policy, and geopolitical shocks. This means investors should be wary of anyone claiming to have a simple, definitive answer to where policy is headed. The most honest answer is often "I don't know". The key isn't to predict the Fed's next move, but to build a portfolio resilient enough to withstand a world where even the rule-makers are figuring things out as they go.