How should the fed’s monetary policy framework change?

Seth Carpenter ()
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Seth Carpenter: Morgan Stanley and Company

Business Economics, 2025, vol. 60, issue 1, No 6, 24 pages

Abstract: Abstract There’s very much a sense in which the Fed’s policy framework was fighting the last war of inflation being persistently too low. As inflation was going up, there were tons of people, saying this is a reversion to something like the 1970s. I think that COVID friction-induced bout of inflation is a very, very different type of inflation than what the framework was intended to address. It was not the framework that drove the high rise in inflation. I don’t think that preemptive policy would have made a night-and-day difference. But if there is something to think about that has changed forever, it is the balance sheet. The creation of so many reserves forced the use of additional tools like the reverse repo facility, which now is starting to cause additional communications issues and challenges. I am not convinced that an inflation range is the right way to go. If the current state of the labor market is part of what’s causing you to forecast inflation to be above target, then you want to pay attention to it. I balk when economists write down a quadratic loss function for the objective function for the central bank. I find it impossible to believe that if inflation is at its target that a lower unemployment rate is somehow worse.

Keywords: Monetary policy framework review; FOMC; Inflation target; Balance sheet (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s11369-025-00392-8

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