An agenda for the Federal Reserve’s review of its monetary policy framework

In August 2020, the Federal Reserve revised its statement of the strategy, tools, and communications practices it uses to achieve its mandate of maximum employment and price stability.

Among other things, the revised statement said that following periods when inflation was below its 2% target the Fed would aim for inflation moderately above 2% for some time. It also said, effectively, that the Fed would act more aggressively when unemployment was high than when it was very low unless it saw inflation rising above its target. The Fed said it would undertake a thorough public review of the framework every five years. Such a review is slated to begin later this year.

In anticipation of the Fed’s review of its framework, the Hutchins Center on Fiscal & Monetary Policy at Brookings convened a two-part conference on June 14. In the morning, Michael Kiley, deputy director of the Fed’s Division of Financial Stability, presented his work on optimal monetary policy under discretion with an asymmetric loss function that sees activity shortfalls as more costly than stronger activity. He concluded this leads to an inflationary bias and that greater symmetry would reduce the size of output shortfalls. Following a response from Michael Bauer, research economist at the San Francisco Fed, Anna Cieslak and Hao Pang of Duke University and Michael McMahon of Oxford University presented their work on how Fed communications influence interest rates. Eric Swanson of the University of California-Irvine responded.

In the afternoon, an expert panel offered the Fed advice on what it should be considering as it undertakes the framework review. Panelists included Don Kohn of Brookings (a former Fed vice chair), Mike McMahon, Christina Romer of University of California-Berkeley, and Brian Sack of Balyasny Asset Management; the Hutchins Center’s David Wessel will moderate.

Viewers joined the conversation and ask questions of the speakers by emailing [email protected] or on X/Twitter at @BrookingsEcon using the hashtag #FedFramework.

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