What does the new long-run monetary policy framework imply for the path ahead?

Abstract

Following a lengthy review, the FOMC recently revised its long-run monetary policy strategy statement, largely in recognition of the persistent threat the effective lower bound (ELB) on policy rates poses to its dual mandate goals. Under traditional monetary policy strategies, the ELB imparts a persistent downward bias to inflation and inflation expectations; to offset this, new strategies are needed which will at times deliver inflation above 2%. The new framework addresses this issue and seeks to achieve inflation that averages 2% over time. It also emphasizes that maximum employment is a broad-based and inclusive goal, and that the FOMC should seek to eliminate shortfalls—rather than symmetric deviations—from maximum employment. The FOMC’s September policy statement provided forward guidance that is fully consistent with the new strategy. Historical retrospection of the 2015–2018 liftoff period suggests that, if it were in place over that time, the new framework and forward guidance likely would have forestalled rate increases and potentially delivered better macroeconomic outcomes. More, generally, to reduce employment shortfalls and average 2% inflation over time, the FOMC needs to have an “in it to win it” attitude toward our inflation objective. The September FOMC statement’s forward guidance that inflation should be at 2% and confidently on track for overshooting before we liftoff from the ELB is an important step in that direction.