Lessons for the FOMC’s Monetary Policy Strategy

The current 5-year review of the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy provides an opportunity to assess the revisions made in 2020. I review the rationale behind the 2020 revisions and then discuss the new operational objectives: asymmetric average inflation targeting and shortfalls from maximum employment. Macroeconomic developments since 2020 led to an environment that was very different than the one anticipated when the 2020 policy framework was adopted. In this new environment, the 2020 changes created a risk that the US would suffer a repeat of the 1970s, a risk compounded by the FOMC’s slow reaction as inflation rose during 2021-2022. I illustrate the consequences of such a delay in addressing high inflation. The experience of the past five years offers some new lessons for the current review of the policy framework, as well as reinforcing the importance of some old lessons.