The Federal Reserve will begin a framework review next year, with the 2% inflation target not being the focus. Powell welcomes new perspectives and critical feedback

On November 22, Tuesday, the Federal Reserve released more details about the framework review plan that will start in January next year.

Among them, discussions among Federal Reserve monetary policy makers will begin at the FOMC meeting on January 28-29, and the Federal Reserve will also hold a seminar on May 15-16, inviting external participants from outside the Federal Reserve system.

The Federal Reserve has established a plan to conduct a "framework review" every five years, with the last framework review starting in 2019 and ending in the summer of 2020. It will also hold public events across the country titled "The Federal Reserve is Listening" to gather public opinions.

The latest framework review will focus on two main areas: one is to review the "Statement on Longer-Run Goals and Monetary Policy Strategy" adopted by the Federal Reserve in August 2020, which outlines the monetary policy guidelines; the second is to explore the Federal Reserve's policy communication tools.

It is noteworthy that the "2% as a long-term inflation target" set by the FOMC will not be a focus of this review. Some analysts believe this may disappoint some in academia and policy analysis circles, who think there are issues with the establishment and level of the inflation target.

For example, according to a report from the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution in July, when the Federal Reserve publicly announced 2% as the inflation target in 2012, economists had differing opinions on the reasonableness of this target:

"Some advocate raising the 2% target to 3% or 4%, while others believe the target should remain unchanged, as it is already a widely accepted concept. There are also calls to set an inflation target range, such as 1.5% to 2.5%, rather than a single number."

In the article "Recommendations for the Federal Reserve's Monetary Policy Framework Review," the aforementioned think tank suggests that the Federal Reserve should take this opportunity to reassess the 2% inflation target but should not change it for now, stating, "It is important to wait until inflation is successfully brought down to 2% before modifying the inflation target."

The Federal Reserve stated in its announcement today that the core of the regular framework review is "its monetary policy strategy, tools, and communication," all of which are part of the framework used by the Federal Reserve to achieve the dual mandate of maximizing employment and price stability granted by Congress.

Federal Reserve Chairman Jerome Powell specifically mentioned a willingness to accept new ideas and critical feedback, and will draw lessons from the past five years to adjust methods where appropriate. After the review, the information and opinions collected during the review period will be evaluated, and the findings will be reported.

Some analysts also pointed out that in the framework review that ended in 2020, when price growth continued to be below the 2% inflation target, the Federal Reserve decided to pursue a practice of exceeding the 2% target for a period of time. Powell stated last week that this time they will shift back to a traditional inflation target:

"After a similar review in 2019, the Federal Reserve modified its framework in 2020 to place greater emphasis on employment goals and allowed for a period of high inflation to offset periods of too-low inflation. Some have criticized that this approach led the Federal Reserve to slow its response to inflation when prices began to accelerate in 2021 (i.e., potentially falling behind the curve)." In addition, the Brookings Institution proposed the following recommendations for the framework review agenda in July this year:

Adopt a robust framework that can respond to various shocks, rather than targeting a specific issue, as the last framework review was too "headache medicine" and completely ignored the possibility of entering a high inflation period;

Define maximum employment and its consistency with price stability;

Reassess the 2% inflation target, but do not change it immediately;

Reassess the officials' interest rate projections "dot plot";

The Federal Reserve needs a better communication strategy to clearly convey its response mechanisms and improve communication with the public;

Clarify when and how to use forward guidance - and include disclaimers;

Discuss the use of quantitative easing in the framework;

Explain the high inflation events during the COVID-19 pandemic, including what happened, what went wrong, and what progressed smoothly