Federal Reserve Chair Jerome Powell is expected to release the details of the Fed’s framework review at this week’s annual Jackson Hole Economic Policy Symposium. The Fed’s framework specifies the objective of monetary policy — that is, how the Fed intends to respond to changes in inflation, unemployment, and production. In other words, it determines how the Fed will conduct monetary policy.
The Fed reviews its framework every four to five years. The current review began in January 2025. In addition to discussions at Federal Open Market Committee (FOMC) meetings, the review included Fed Listens events and the Thomas Laubach Research Conference. Back in January, Powell said Fed officials will “be open to new ideas and critical feedback and we will take on board lessons of the last five years in determining our findings.”
Most Fed watchers anticipate significant revisions to the Fed’s Statement on Longer-Run Goals and Monetary Policy Strategy (henceforth, “Consensus Statement”). At the January FOMC meeting, “participants assessed that it was important to consider potential revisions to the statement, with particular attention to some of the elements introduced in 2020.” Specifically, they identified the “focus on the risks to the economy posed by the [effective lower bound], the approach of mitigating shortfalls from maximum employment, and the approach of aiming to achieve inflation moderately above 2 percent following periods of persistently below-target inflation” as areas of the Consensus Statement potentially in need of revision. That was welcome news to economists like me, since those 2020 changes arguably contributed to the Fed’s slow response to rising inflation in late 2021 and early 2022.
Prior Changes
The Fed made two important changes to its Consensus Statement during its last review, which concluded in August 2020. First, it replaced its Flexible Inflation Target (FIT) with an asymmetric Flexible Average Inflation Target (FAIT). Second, it replaced its symmetric approach to delivering maximum employment with an asymmetric approach aimed at preventing shortfalls from maximum employment. Why did the Fed make those changes then?
The move from FIT to FAIT was intended to address problems with the conduct of monetary policy that emerged in the immediate aftermath of the Great Recession. The Fed formally adopted a 2-percent inflation target in January 2012. Although the Fed’s FIT was intended to deliver inflation at 2 percent, the Fed generally failed to hit its target in the years that followed. The Personal Consumption Expenditures Price Index, which is the Fed’s preferred measure of inflation, grew at a mere 0.9 percent on average from January 2012 to January 2016. As I wrote back in 2015, it was “widely believed that the Fed’s stated 2 percent target is, in fact, a 2 percent ceiling.”
In 2016, the Fed revised its Consensus Statement to clarify that its 2-percent FIT was symmetric: it would be just as likely to overshoot its inflation target as to undershoot it. By clearly stating that its FIT was symmetric, the Fed hoped to anchor inflation expectations at 2 percent and, in doing so, make it easier to conduct monetary policy to deliver 2-percent inflation. As written in the 2016 Consensus Statement:
Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances.
Alas, that proved easier said than done. Inflation (as measured by PCEPI) averaged just 1.7 percent from January 2016 to January 2020, just prior to the pandemic.
Having persistently undershot its inflation target under FIT for the better part of a decade, the Fed adopted its FAIT framework in August 2020. Whereas FIT was designed to deliver 2 percent inflation on a go-forward basis, regardless of any past mistakes, FAIT included a make-up policy that was intended to deliver 2-percent inflation on average. The Fed was explicit in noting that, “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” It did not explicitly state how it would conduct policy following periods when inflation has been running persistently above 2 percent, but the assumption I (and many other economists) had at the outset was that it would engage in FAIT symmetrically — i.e., that it would similarly make up for periods when inflation had been too high. The A in FAIT stood for average, after all; and inflation would not average 2 percent if the Fed only made up for periods of below-target inflation.
Despite the name, we soon learned that the Fed did not intend to make up for periods of above-target inflation. Inflation (as measured by PCEPI) has averaged 3.9 percent since August 2020. And, although the Fed has worked to bring inflation back down to 2 percent from a high of 11.3 percent in June 2022, it does not intend to deliver below-target inflation for a period, as would be required for inflation to average 2 percent. FAIT was not symmetric: the Fed would only engage in make-up policy if it undershot its target.
The reason for the move from a symmetric approach to delivering maximum employment to an asymmetric approach is somewhat harder to pin down. Three possible reasons come to mind.
- Fed officials wanted to reinforce the Fed’s asymmetric approach to targeting inflation.
- Fed officials came to accept a plucking model of business cycles.
- Fed officials became concerned about employment gaps between races, and thought the best way to prevent such gaps was to ensure the economy was always at or above full employment.
One might make a strong case for any of these reasons, and perhaps all three played a role. In any event, the consequences of such an approach soon became clear: the Fed was slow to tighten monetary policy when inflation picked up in 2021, out of concern that doing so might cause employment to fall below potential.
Expected Changes
Although the Fed has not yet released its revised Consensus Statement, the minutes from FOMC meetings held earlier this year offer a good sense of what changes will be made.
At the March 2025 meeting, participants “discussed the implications of pursuing a strategy that seeks to mitigate shortfalls of employment from its maximum level, as described in the statement, and the ways the public has interpreted that approach since it was introduced into the statement” and “indicated that they thought it would be appropriate to reconsider the shortfalls language.” In other words, the Fed is likely to replace its focus on shortfalls from maximum employment with deviations from maximum employment, which would result in a more symmetric approach to achieving maximum employment.
At the May 2025 meeting, participants “indicated that they thought it would be appropriate to reconsider the average inflation-targeting language in the Statement on Longer-Run Goals and Monetary Policy Strategy.” They “noted that an effective monetary policy strategy must be robust to a wide variety of economic environments” and “viewed flexible inflation targeting as a more robust policy strategy capable of correcting persistent deviations of inflation from either side of the Committee’s 2 percent longer-run objective.” In sum, the Fed is likely to replace its asymmetric FAIT with a symmetric FIT.
Taken together, the FOMC meeting minutes from March and May of this year suggest the Fed intends to undo the changes made to the Consensus Statement back in August 2020. That’s understandable, given the experience of the last five years. Focusing on shortfalls rather than deviations from maximum employment and failing to commit to offset periods of above-target inflation enabled the Fed to delay tightening monetary policy in late 2021 and early 2022. As a consequence, inflation rose higher than it otherwise would — and the level of prices will remain permanently elevated above its pre-2020 trend path. In other words: the Fed’s framework did not serve the American people well during this period.
Tell Me Why
Somewhat surprisingly, Chair Powell maintains that the existing framework did not prevent the Fed from conducting policy appropriately over the last five years:
There was nothing moderate about the overshoot. It was an exogenous event. It was the pandemic and it happened and, you know, our framework permitted us to act quite vigorously. And we did, once we decided that that’s what we should do. The framework had really nothing to do with the decision to — we looked at the inflation as — as transitory and — right up to the point where the data turned against that. [W]hen the data turned against that in late ‘21, we changed our — our view and we raised rates a lot. And here we are at 4.1 percent unemployment and inflation way down. But the framework was more irrelevant than anything else — that part of it was irrelevant. The rest of the framework worked just fine as — as we used it — as it supported what we did to bring inflation down.
The existing framework, according to Powell, is not broken and, hence, does not need to be fixed.
Powell’s statement is somewhat surprising for at least three reasons, as my colleague Bryan Cutsinger has explained. First, the emerging consensus is that much of the inflation experienced between 2021 and 2024 was due to excessive demand, which monetary policy could have and should have offset. Second, the Fed clearly delayed tightening monetary policy, just as one would expect it to do given its existing framework. Third, the Fed’s asymmetric FAIT framework prevented it from bringing prices back down to where they would have been had it not allowed demand to surge; the lack of make-up policy following an overshoot meant prices would remain permanently elevated.
Powell’s remarks also seem incongruent with the facts that (1) the Fed is revising its framework and (2) as he himself has stated, Fed officials “will take on board lessons of the last five years” in making revisions. If the framework “worked just fine” and permitted the Fed to “act quite vigorously” over the last five years, as Powell maintains, then surely the lesson is that the Fed should leave its well-functioning framework as is. As my grandpa used to say: don’t fix what’s not broken.
It seems more likely that Powell and others at the Fed recognize the problems with the existing framework and are making changes to improve it, but do not want to acknowledge their errors: adopting a faulty framework in August 2020 and then sticking with it in late 2021 and early 2022, as inflation climbed. The reluctance for Fed officials to admit they made a mistake — and, in this case, two mistakes — is not at all surprising. The Fed’s mea culpa for the Great Depression was seventy years in the making.
