The Death of 2%: What Happens When the Fed Moves the Goalposts?

August 26, 2025

For decades, the Federal Reserve’s credibility rested on a single promise: inflation would return to 2%.

It was the anchor for monetary policy, the yardstick for markets, and the quiet reassurance for anyone worried about runaway prices.

That era just ended.

On Friday, Jerome Powell and the Fed quietly dropped the language about “achieving inflation that averages 2% over time” and replaced it with a softer, more ambiguous line about keeping expectations anchored.

In plain English: 2% is no longer a target — it’s an aspiration.

This is more than a semantic tweak.

It’s a fundamental shift in how the Fed defines success.

And when the referee changes the rules mid-game, investors have to rethink everything.

Why It Matters for Markets

  1. Credibility Risk: If the Fed admits it can’t deliver 2% anymore, investors will start to question what else is up for negotiation. Anchored expectations are the only real tool the Fed has left — once those slip, the risk premium on U.S. assets rises.

  2. Inflation Normalization: By abandoning 2%, the Fed is effectively telling us higher inflation is permanent. 3–4% becomes the “new normal,” whether they say it out loud or not.

  3. Asset Prices on Steroids: Lower rates plus higher tolerated inflation equals more cheap money chasing fewer productive assets. Expect higher equity valuations, frothier housing markets, and more speculative manias.

Investor Psychology Has Changed

For years, investors assumed the Fed would “do whatever it takes” to hit 2%.

That kept long-term bonds attractive and gave markets confidence inflation wouldn’t spiral.

Now the psychology flips. Instead of asking “When will inflation come back to 2%?” the new question is “How high can inflation go before the Fed cares enough to act?”

That’s a very different world.

The Bottom Line

The Fed hasn’t just moved the goalposts — they’ve taken them off the field entirely.

By quietly downgrading 2% from a target to a wish, Powell has told investors what many already suspected: inflation at 2% isn’t happening this cycle.

This is the green light for risk assets in the short run — but it also sets the stage for greater volatility and long-term instability.

A world without anchors is great for traders, dangerous for savers, and unpredictable for everyone else.

The game has changed. Now we find out who can play without rules.

—DOTD