The Federal Reserve is treating tariff-driven inflation as an overseas supply shock.
The Personal Consumption Expenditures price index — the inflation gauge the Federal Reserve designated as its preferred measure under the Statement on Longer-Run Goals and Monetary Policy Strategy — stood at 3.7% year-over-year as of last reporting, well above the 2% target the Federal Open Market Committee reaffirmed in its August 2025 review. Three-point-seven percent is eighty-five percent above target.
Here is the sequencing the wire reports. “The Fed moved closer to its target in early 2025, but inflation then started creeping higher as the U.S. imposed a wide range of tariffs globally,” per the Associated Press dispatch of August 24. “The rate of inflation leaped higher in early 2026 as the Iran war curtailed global oil shipments from the Strait of Hormuz.”
Read that again. Tariffs are a domestic policy choice made by a domestic administration. They are not a hurricane. They are not a pandemic. They are not a war fought on the other side of the planet that has nothing to do with the policy mix the Federal Reserve is supposed to be steering through. The Strait of Hormuz closure is closer to an exogenous shock; a tariff schedule promulgated by the United States Trade Representative is closer to a budget document. Both are now inside the inflation print. The Federal Reserve, which holds dual-mandate responsibility for price stability, is being asked to treat them as if they were weather.
The Jackson Hole symposium convenes this week. The annual gathering of central bankers and economists will be “closely watched for signals about the Fed’s next policy moves,” per AP. The signals worth watching are not the ones anyone is pricing. The market is pricing the next FOMC decision. The signal worth watching is whether the Federal Reserve will name what it is looking through.
This is the second time in five years the Federal Reserve has been asked to look through a domestic policy choice while calling the resulting inflation “transitory.” The first run, in 2021, ended when the cumulative damage to real wages had already been done; the Federal Reserve retired the word “transitory” in late November of that year. The institutional memory of that mistake is now on file at every FOMC briefing book since.
The Statement on Longer-Run Goals the Federal Reserve adopted in January 2012, revised in August 2020, and revised again in August 2025, sets the 2% inflation target as a “symmetric” objective — meaning deviations above and below the target are treated as equivalent. The 3.7% reading is not symmetric to anything; it is eighty-five percent above target on the high side and zero on the low side. The symmetric-mandate framing makes the language of “balanced risks” available to describe a one-sided overshoot. The Federal Reserve has used it.
The Iran-war supply shock is real and is closer to an exogenous shock than the tariff schedule is. Energy-price pass-through into core services is a documented transmission channel; the August 2025 Statement revision explicitly accommodates supply-side shocks in the new flexible inflation-targeting framework. What the framework does not accommodate is a Federal Reserve that declines to distinguish, in its public communication, between the inflation it inherited from a war and the inflation it inherited from a tariff promulgated in the previous calendar year.
The Federal Reserve does not recommend. That convention dates to the founding charter and has served the institution well. What the Federal Reserve does, and what Jackson Hole will showcase, is communicate. A communication that conflates a domestic policy choice with an overseas supply shock is a communication that has chosen, in advance, not to hold the policy choice accountable for its price-level consequences.
The score is the score.