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What does the new long-run monetary policy framework imply for the path ahead?
1Federal Reserve Bank of Chicago, Chicago, USA.
Business Economics (Cleveland, Ohio)
|January 11, 2021
Summary
The Federal Open Market Committee (FOMC) revised its monetary policy strategy to address the effective lower bound (ELB) challenge. New strategies aim for 2% average inflation and inclusive maximum employment, potentially improving economic outcomes.
Area of Science:
- Monetary Economics
- Macroeconomic Policy
- Central Banking
Background:
- The effective lower bound (ELB) on policy rates challenges traditional monetary policy.
- Persistent downward bias on inflation and expectations necessitates new strategies.
- FOMC's dual mandate goals are threatened by the ELB.
Purpose of the Study:
- To revise the FOMC's long-run monetary policy strategy.
- To address the challenges posed by the ELB.
- To achieve average 2% inflation and inclusive maximum employment.
Main Methods:
- Review of long-run monetary policy strategy.
- Analysis of the impact of the ELB on policy goals.
- Evaluation of new framework and forward guidance consistency.
Main Results:
- New framework seeks average 2% inflation over time.
- Emphasis on broad-based, inclusive maximum employment, eliminating shortfalls.
- Forward guidance consistent with the new strategy.
Conclusions:
- The new framework and forward guidance could have improved outcomes in the 2015-2018 liftoff period.
- FOMC requires a committed approach to achieve inflation and employment goals.
- September FOMC statement's guidance is a step towards achieving these objectives.
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