WASHINGTON – On Friday, the U.S. Federal Reserve announced plans for a May 15-16 conference and public “Fed Listens” events around the country as part of a review of its long-run strategy and approach to policymaking.
The so-called “framework review,” the second of what is now intended as regular five-year analyses of the U.S. central bank’s overarching approach to monetary policy, will kick off with discussions among policymakers beginning in January, but look outside the institution as well through the conference and the community events.
“We are open to new ideas and critical feedback and will take onboard lessons from the last five years and adapt our approach where appropriate to best serve the American people, to whom we are accountable,” Fed Chair Jerome Powell said.
Notably, the statement said the Fed’s 2% inflation goal “will not be a focus of the review,” a likely disappointment to some in academic and policy analysis circles who feel the specification of a target, and the level at which it is set, has become a problem for the central bank.
After a similar review in 2019, the Fed revised its framework in 2020 to put more emphasis on its employment goals, and to allow a period of high inflation to offset times when inflation was too low, as it had been for much of the 2010s and until the COVID pandemic.
Some have blamed that approach, and the way the Fed applied it, as slowing the central bank’s response to inflation as prices began to accelerate in 2021.
In comments at a Dallas Fed event on November 14, Powell laid out a core question the review will need to answer: Whether the experience of the last few years, with high inflation and interest rates, means the central bank should return to a more traditional form of policymaking that puts more emphasis on keeping inflation contained and is concerned less about the problems that come from a low-inflation, low-rate environment.
“Shouldn’t we change the framework to reflect interest rates are higher now, so that some of the changes we made are probably not necessary, or, in any case, shouldn’t be the base case anymore?” Powell said. “The base case should be more like a traditional reaction function, where you don’t promise an overshoot, you just target inflation. We haven’t made any decisions, but those are the questions we’ll be asking.”
For much of the 2010s, the Fed’s benchmark policy rate was pinned near the zero level, yet despite those very loose financial conditions inflation was mired below the target. It was a vexing situation for the Fed, and one that led to concern the U.S. had entered an era of prolonged economic stagnation.
The framework approved in 2020 was oriented around that set of circumstances, focused on how to react when inflation was too low, and putting more priority on trying to keep employment elevated since high inflation was not seen as much of a risk.
Other issues that may be discussed, and that former Fed officials and others have begun to mull, is how the central bank can best communicate its policy plans, and whether it should or should not make promises about future interest rate decisions.
Strictly worded “forward guidance,” pledging to keep interest rates at zero until the job market recovered from the pandemic recession, arguably kept the Fed from responding as fast as it might have otherwise done to rising inflation in 2021.
