Fed to review monetary policy framework

The Federal Reserve plans to review the monetary policy framework it uses to pursue its mandate next year, it announced on November 15.

In the statement it said it will examine its strategies, tools and communication practices, and will reach out to a “broad range” of stakeholders.

The outreach effort will include a research conference in June at the Reserve Bank of Chicago, and a number of public events around the country.

“With labour market conditions close to maximum employment and inflation near our 2% objective, now is a good time to take stock of how we formulate, conduct, and communicate monetary policy,” said Federal Reserve chairman Jerome Powell.

The announcement follows a number of Fed officials calling for a formal process to evaluate the framework. It was revealed that several Federal Open Market Committee (FOMC) members indicated periodic reviews of the framework would be desirable in the September and July meeting minutes.

Boston Fed president Eric Rosengren co-authored a paper arguing the “dynamic” monetary history of the US, including the Great Depression, Great Inflation and Great Recession, suggests the existing evaluation framework is not optimal.

In the paper, the authors say the issue is in the depth with which the FOMC currently reviews the framework. They reference the more “comprehensive and regular evaluation” by the Bank of Canada as an effective policy.

The Bank of Canada conducts a regular formal review of the goals of its monetary policy and approaches to attaining the goals. The approach involves staff research and feedback from the public, government and academics.

In early 2018, Cleveland Fed president Loretta Mester also suggested it may be time for the central bank to review its current monetary policy framework.

In her speech, Mester outlined a number of inflation targeting routes the Fed could consider when conducting such a review. However, “a change from flexible inflation targeting shouldn’t be decided cavalierly”, she said.

Mester argued setting a higher inflation target would make it “more likely” the Fed would be able to avoid the zero lower bound in the event of a crisis.

She also presented the case for “price-level targeting”, which would see the central bank target a gradually rising price level, rather than a fixed inflation target. In this framework, a sustained period of below-target inflation would need to be offset by a period of above-target inflation.

Ex-Fed chair Ben Bernanke suggested price-level targeting would be best used as a temporary measure when the central bank hits the zero lower bound. New York Fed president John Williams has previously been a strong advocate for the measure but, in contrast to Bernanke, has said it should be permanent.

In a different framework recommendation, St Louis Fed president James Bullard recently proposed a “modernised” monetary rule, adapting the Taylor Rule.

In his speech on October 18 he said adjustments should account for “important macroeconomic developments” that have happened in recent decades. The feedback from the real economy to inflation today is weaker than it used to be, he argued.