Q&As
What were the goals of the Federal Reserve's review?
Why is the Statement on Longer-Run Goals and Monetary Policy Strategy important and why did it need to be revised?
What changes in the economy do the revisions to the Statement on Longer-Run Goals and Monetary Policy Strategy reflect?
What other tools besides changing the level of the federal funds rate does the Federal Reserve have to achieve its maximum employment and price stability objectives?
Why does the new Statement on Longer-Run Goals and Monetary Policy Strategy emphasize that maximum employment is a broad-based and inclusive goal?
How has the review altered how the Federal Reserve will pursue its maximum employment objective?
Has the Federal Reserve's inflation objective changed? Why is the Federal Reserve interested in achieving inflation that averages 2 percent over time?
What role does monetary policy play in achieving a stable financial system?
How do the changes to the Statement on Longer-Run Goals and Monetary Policy Strategy affect the way that monetary policy is conducted?
What role did perspectives outside of the Federal Reserve System play in shaping the revised Statement on Longer-Run Goals and Monetary Policy Strategy?
Will the Federal Reserve be conducting broad reviews of its policy strategy in the future?
What were the goals of the Federal Reserve's review?
The Federal Reserve's review involved taking a broad and open-minded look at the monetary policy strategy, tools, and communications practices it uses to pursue its congressionally-assigned goals of maximum employment and price stability, known as the dual mandate. Because the economy is always evolving, the Federal Reserve's strategy for achieving its goals must adapt to meet the new challenges that arise. The purpose of the review was to take stock of lessons learned since 2012—when Federal Open Market Committee (FOMC) first issued its Statement on Longer-Run Goals and Monetary Policy Strategy—and to identify any further changes to its strategy, tools, and communication practices that could enhance the Federal Reserve's ability to achieve its maximum employment and price stability objectives.
Why is the Statement on Longer-Run Goals and Monetary Policy Strategy important and why did it need to be revised?
The Statement on Longer-Run Goals and Monetary Policy Strategy is important because it explains how the FOMC interprets its congressional mandate, articulates its approach to monetary policy, and serves as the foundation for its policy actions. The new statement has many of the same core elements with the previous statement, which was a major achievement when it was first issued in 2012 and has served the economy well. However, the economy has evolved in important ways since 2012, and the changes in the new statement reflect these developments.
What changes in the economy do the revisions to the Statement on Longer-Run Goals and Monetary Policy Strategy reflect?
One important change is that the general level of interest rates has fallen, both here in the United States and around the world. This decline has profound implications for monetary policy. With interest rates generally running closer to their effective lower bound even in good times, the FOMC has less room to cut the policy interest rate when needed to support the economy. It also means that the federal funds rate is likely to be constrained by the effective lower bound more frequently than in the past. Another important change is that prior to the pandemic we witnessed a record long expansion in which the labor market was very strong and did not trigger a significant rise in inflation. The gains in the labor market were widely shared across society, and thus the revised statement reflects a greater appreciation that the benefits of a strong labor market may be sustained without triggering an unwelcome rise in inflation.
What other tools besides changing the level of the federal funds rate does the Federal Reserve have to achieve its maximum employment and price stability objectives?
Adjustments in the federal funds rate are the primary means for altering the stance of monetary policy in response to changing economic circumstances. The Committee may deploy other tools as necessary to foster its objectives, including forward guidance about future settings of the federal funds rate and balance sheet policies. The Federal Reserve also relies on its emergency lending powers authorized by Congress to help limit the economic damage from crises such as the one caused by the COVID-19 pandemic. The Federal Reserve is committed to using its full range of tools to support the U.S. economy as necessary and will do all it can to achieve its maximum employment and price stability goals.
Why does the new Statement on Longer-Run Goals and Monetary Policy Strategy emphasize that maximum employment is a broad-based and inclusive goal?
The role of monetary policy is to support a strong, stable economy that benefits all Americans. The characterization of our maximum employment goal as broad-based and inclusive clarifies that the Federal Reserve seeks to foster economic conditions that benefit everyone. It also stresses the importance of understanding how various communities are experiencing the labor market when assessing the degree to which employment in the economy as a whole is falling short of its maximum level.
How has the review altered how the Federal Reserve will pursue its maximum employment objective?
The previous expansion demonstrated that a strong labor market can be sustained without inducing an unwanted increase in inflation. To the contrary, when unemployment fell to levels that were previously thought to be unsustainable, the labor market proved remarkably adaptable, bringing many benefits to families and communities that all too often had been left behind. Accordingly, the new Statement on Longer-Run Goals and Monetary Policy strategy only refers to "shortfalls of employment from its maximum level" rather than the "deviations from its maximum level" used in the previous statement. This change signals that high employment, in the absence of unwanted increases in inflation or the emergence of other risks that could impede the attainment of the Committee's goals, will not by itself be a cause for policy concern.
Has the Federal Reserve's inflation objective changed? Why is the Federal Reserve interested in achieving inflation that averages 2 percent over time?
The Federal Reserve's longer-run inflation objective remains 2 percent. The revised Statement on Longer-Run Goals and Monetary Policy Strategy reflects the view that this objective can best be met by seeking to achieve inflation that averages 2 percent over time. If inflation runs below 2 percent following economic downturns but never moves above 2 percent even when the economy is strong, then over time inflation will average less than 2 percent. Inflation averaging less than 2 percent over time can lead to an unwelcome fall in longer-term inflation expectations, which in turn can pull actual inflation lower, resulting in an adverse cycle of lower inflation and inflation expectations. With lower expected inflation, the nominal level of interest rates will be lower too, leaving less room for the FOMC to cut interest rates when needed to support the economy in a downturn. By seeking inflation that averages 2 percent over time this will help ensure longer-run inflation expectations do not drift down and remain well anchored at 2 percent. For these reasons, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
What role does monetary policy play in achieving a stable financial system?
Achieving a stable macroeconomic environment in which shortfalls from maximum employment are eliminated and inflation is running at 2 percent, and expected to remain so, is supportive of a stable financial system. At the same time, the stability of the financial system is necessary for the sustained achievement of our statutory goals of maximum employment and price stability. Therefore, as indicated in the Statement on Longer-Run Goals and Monetary Policy Strategy, risks to the financial system are an important factor in the FOMC's policy decisions.
How do the changes to the Statement on Longer-Run Goals and Monetary Policy Strategy affect the way that monetary policy is conducted?
The revisions in many ways are consistent with the way that the Federal Reserve has been conducting policy in recent years and reflect the strong commitment the Federal Reserve has to achieving its goals. There is also much in the way of continuity with the previous statement. However, there are also important changes. The most concrete implications of these will be easiest to see in good times, after the economy has recovered from the disruption caused by the COVID-19 pandemic. In particular, inflation should not run persistently below our objective as we seek to achieve inflation that averages 2 percent over time. Similarly, when the economy is robust, high employment, in the absence of unwanted increases in inflation or the emergence of other risks that could impede the attainment of the Committee's goals, will not by itself be a cause for policy concern.
What role did perspectives outside of the Federal Reserve System play in shaping the revised Statement on Longer-Run Goals and Monetary Policy Strategy?
An important pillar of the review were 14 Fed Listens events in 2019 that engaged a wide range of organizations—employee groups and union members, small business owners, residents of low- and moderate-income communities, retirees, and others—to hear about how monetary policy affects peoples' daily lives and livelihoods. Another event was held in May 2020 to hear about the effects of the COVID-19 pandemic on communities around the United States. These events provided valuable feedback on monetary policy. One of the clear messages that resulted from these events was that the strong labor market that prevailed before the pandemic was generating employment opportunities for many Americans who had not found jobs readily available in the past. This message underscored the importance of achieving and sustaining a strong job market, particularly for people from low- and moderate-income communities. The revisions to the statement, particularly those pertaining to our maximum employment objective, very much reflect this message.
Will the Federal Reserve be conducting broad reviews of its policy strategy in the future?
The Federal Reserve's review proved to be an effective platform for strengthening the connection between the Federal Reserve and its core constituency, the American people. Periodic reviews of this sort can enhance the Federal Reserve's transparency and accountability and thus are good institutional practice. Moreover, because the economy is constantly evolving, periodic reviews can be an effective way to reflect on how changes to the economy affect monetary policy and identify possible changes in policy strategy, tools, or communication practices that could enhance the Federal Reserve's ability to achieve its maximum employment and price stability objectives. Therefore, as the Statement on Longer-Run Goals and Monetary Policy Strategy indicates, the Federal Reserve plans to undertake a thorough public review of its monetary policy strategy, tools, and communication practices roughly every five years.