Fed's Powell: Time to reconsider monetary policy strategy, communications
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Fed chair Jerome Powell. Photo: Tierney L. Cross/Bloomberg via Getty Images
The Federal Reserve is gearing up to re-evaluate how it sets and communicates monetary policy in light of economic shifts of the last five years, chair Jerome Powell said Thursday.
The big picture: The Fed is reviewing its monetary policy framework — the goals and methods it uses to set interest rate policy and communicate it to the public — for the first time since 2020.
- It is looking to incorporate the lessons of the 2021 inflation surge and subsequent reset of global interest rates higher.
- The current framework arguably contributed to the Fed's slowness to realize the severity of that inflation burst.
What they're saying: "In the current review," the Fed's policy committee "is engaged in discussions about what we have learned from the experience of the past five years," Powell said at a Fed conference this morning, according to prepared remarks.
- "We are paying particular attention to the 2020 changes as we consider discrete but important updates reflecting what we have learned about the economy, and the way those changes were interpreted by the public," he said.
- The Fed policymakers "will also consider potential enhancements to our formal policy communications, particularly regarding the role of forecasts and uncertainty," he added.
Context: The framework review has been planned as an every-five-years exercise.
- The comments were made to kick off an academic conference in Washington aimed at airing ideas for how it might be changed.
Between the lines: The current monetary policy framework was shaped in an environment of persistently low inflation and interest rates stuck near zero.
- As a result, Fed officials were more focused on the risk of being unable to stimulate the job market adequately than on how to respond to an outburst of inflation.
- Now, inflation has been above the Fed's target for four consecutive years and global interest rates have reset higher, making those issues seem like the challenges of a different era.
Of note: Powell emphasized that the review will include a focus on the how to communicate uncertainty about the future path of policy.
- "As we have been reviewing assessments of the 2020 framework of policy decisions in recent years, a common observation is the need for clear communications as complex events unfold," he said.
- "A critical question is how to foster a broader understanding of the uncertainty that the economy generally faces," particularly in times with large or more frequent shocks.
What's next: The officials plan to complete their review "in coming months," Powell said.
