Watch: Powell Says Fed Will Adjust Its Rate-Setting Framework | WSJ

Summary

In this address, the speaker highlights the importance of Thomas Lawach’s research and the ongoing reviews of the FOMC’s monetary policy framework. The review aims to reassess strategic tools, particularly regarding inflation targeting and policy communication. The speech reflects on lessons learned from recent economic conditions, especially post-pandemic, with a focus on ensuring the robustness of policy in the face of challenges like supply shocks. The speaker emphasizes the role of clear communication to reduce uncertainty and enhance public understanding, while remaining committed to maintaining the 2% inflation target.

Takeaways

• 😀 The FOMC's 2025 review will reconsider aspects of its strategic framework, focusing on the past five years of experience.
• 😀 The review will also explore potential enhancements to the committee's policy communication tools, including forecasts, uncertainty, and risks.
• 😀 The 2012 consensus statement codified the FOMC's monetary policy framework, with a 2% inflation target and a commitment to clear communication.
• 😀 The framework needs to evolve as economic conditions and policymakers' understanding of the economy evolve over time.
• 😀 The 2019 review introduced the idea of periodic, five-year reviews of the FOMC's framework to assess its effectiveness and engage with the public.
• 😀 The framework change in 2020 included a focus on achieving inflation moderately above 2% following persistent shortfalls, as well as emphasizing the maximum level of employment.
• 😀 The FOMC acknowledged that the lower bound of interest rates presented risks for inflation and employment and took steps to mitigate these risks.
• 😀 The pandemic shifted the FOMC's priorities, leading to a reevaluation of its approach to inflation, which resulted in aggressive rate hikes when inflation exceeded expectations.
• 😀 The recent economic environment, with higher interest rates and more volatile inflation, requires adjustments to the FOMC's framework and policy tools.
• 😀 Clear communication is crucial for fostering understanding of the economy's uncertainty, especially during periods of larger and more frequent economic shocks.

Q & A

What was the primary focus of the 2025 review mentioned in the speech?

The 2025 review primarily focuses on reconsidering aspects of the Federal Open Market Committee (FOMC) strategic framework, including potential enhancements to policy communication tools regarding forecasts, uncertainty, and risks. It also reflects on the experience of the last five years.

How does the speech describe the FOMC's approach to its monetary policy framework since 2012?

Since 2012, the FOMC's approach to its monetary policy framework has been based on a document called the 'consensus statement,' which outlines the commitment to a 2% inflation target, transparency, and clarity in policy actions to reduce uncertainty and improve effectiveness.

What was the significance of the 'great depression,' 'great inflation,' and 'great moderation' mentioned in the speech?

These terms are used to describe different economic periods. The speech emphasizes that each period posed distinct challenges, such as the Great Depression's deflationary effects, the Great Inflation's risk of runaway prices, and the Great Moderation's stability, which has influenced the evolution of the FOMC's monetary policy framework.

What is the significance of the 2% inflation target adopted by the FOMC?

The 2% inflation target, adopted in 2012, is a cornerstone of the FOMC's monetary policy framework. It serves to anchor inflation expectations, reduce uncertainty, and provide clarity about the FOMC's long-term policy objectives, which helps guide the economy toward stable growth and low inflation.

Why did the FOMC adopt a policy to make up for persistent shortfalls from the inflation target?

The FOMC adopted this policy to address the risks associated with being near the lower bound for interest rates. The goal was to ensure that inflation would return to the 2% target after extended periods of low inflation, without damaging employment and economic growth.

What was the response of the FOMC to inflationary pressures after the pandemic?

Following the pandemic, the FOMC initially projected that inflation would subside quickly. However, as inflation remained high, they adjusted their stance by raising the policy rate by 525 basis points over 16 months, aiming to bring inflation down from its peak of 7.2% in 2022.

How did the economic environment change since 2020, according to the speech?

Since 2020, the economic environment has seen a significant rise in long-term interest rates, driven by higher real rates. The speech suggests that this change may be due to increased volatility in inflation and the possibility of more frequent and persistent supply shocks.

What did the FOMC learn from the experience of the past five years that is influencing their current review?

The FOMC's current review reflects lessons learned from the pandemic's impact on inflation, the volatility of supply shocks, and the effectiveness of their policy tools. The review includes reconsidering the language around shortfalls and refining their communication strategies regarding policy decisions and uncertainties.

What is the FOMC's view on the necessity of clear communication during periods of economic uncertainty?

The FOMC recognizes that clear communication is essential, especially during times of greater economic uncertainty or frequent shocks. They emphasize the need to convey the uncertainty surrounding their economic understanding and outlook to foster broader public comprehension.

How does the speech indicate the FOMC plans to enhance its policy communication in the future?

The FOMC plans to enhance policy communication by focusing on the role of forecasts and addressing uncertainty. They aim to improve public understanding of the economic challenges they face and the decisions made, especially during complex and volatile periods.