Fed to Reassess Monetary Policy Framework, Focus on Communications
The Federal Reserve will undertake its quinquennial monetary policy framework review, with a strong emphasis on enhancing communication strategies to better convey economic uncertainty, Fed Chair Jerome Powell announced in prepared remarks on Framework Review at the Thomas Laubach Research Conference on Thursday.
“The structure of the economy evolves over time, and monetary policymakers’ strategies, tools, and communications need to evolve with it,” Powell stated. “A framework should be robust to a broad range of conditions but also needs to be updated periodically as the economy and our understanding of it evolve.”
The Federal Open Market Committee (FOMC) will explore possible improvements to policy communication, particularly regarding forecasts, uncertainty, and risks, Powell said. The review process is expected to conclude by the end of summer.
In the previous framework review, the Fed adopted average inflation targeting, allowing inflation to exceed its 2% target temporarily to compensate for previous periods of low inflation. However, with the onset of the COVID-19 pandemic in 2020, this approach became irrelevant to policy discussions. “The idea of an intentional, moderate overshoot proved irrelevant to our policy discussions and has remained so through today,” Powell explained.
Powell noted that the economic environment has shifted dramatically since 2020, with longer-term interest rates rising significantly, driven largely by real rates rather than inflation expectations. “Many estimates of the longer-run level of the policy rate have risen, including those in the Summary of Economic Projections,” Powell added.
He also warned that inflation may be more volatile in the coming years, with the potential for more frequent and persistent supply shocks, posing challenges for both the economy and central banks.
The Fed will scrutinize its communication approach, particularly the consensus statement released after each FOMC meeting. “In our discussions so far, participants have indicated that they thought it would be appropriate to reconsider the language around shortfalls,” Powell said.
The review will also address how policymakers communicate forecasts and economic uncertainty. “A critical question is how to foster a broader understanding of the uncertainty that the economy generally faces,” Powell added. “In periods with larger, more frequent, or more disparate shocks, effective communication requires that we convey the uncertainty that surrounds our understanding of the economy and the outlook.”