Considerations for the Federal Reserve’s upcoming framework review

Loretta J. Mester ()
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Loretta J. Mester: University of Pennsylvania

Business Economics, 2025, vol. 60, issue 1, No 5, 15-20

Abstract: Abstract A monetary policy framework should be effective across a wide variety of economic circumstances. Since the economic environment today is considerably different from what it was in the decade leading up to the 2019–2020 review, there is scope for some improvements in the FOMC's framework. While the inflation target should remain the same, there should be more emphasis on a symmetric approach, which recognizes that inflation can go above target as well as below target and recognizes that the level of employment need not be consistent with stable prices. The consensus statement should also acknowledge that the risks to inflation and employment can vary over time and that policy will need to balance these risks. The strategy and consensus statement should reinforce the forward-looking and pre-emptive nature of setting appropriate monetary policy. The upcoming framework review should spend some effort on examining potential improvements to the FOMC's communication strategy. The FOMC should issue post-meeting statements that more clearly explain the linkage between economic developments and policy action or inaction. Putting somewhat less weight on the modal outlook and more on potential risks to the outlook would help the public understand that if certain risks are realized, policy may have to deviate from the previously communicated modal path. The FOMC should also consider improvements to the Summary of Economic Projections (SEP). I anticipate that the FOMC review will consider monetary policy tools and, in particular, asset purchases and forward guidance. Finally, the review should consider how best to incorporate financial stability considerations into the monetary policy framework.

Keywords: Monetary policy review; Inflation target range; Maximum employment; Balance sheet policy; Forward guidance (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s11369-025-00390-w

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