On Aug. 22, 2025, the Fed released its new Statement on Longer-Run Goals and Monetary Strategy. The first such statement was issued in 2012, and it underwent a major revision in 2020. The new statement revises or eliminates problematic aspects introduced in 2020. Specifically, asymmetric average inflation targeting has been dropped. The strategy is no longer focused on a strategy designed for a low interest rate, low inflation economic environment. And no mention is made of responding only to shortfalls of employment from maximum employment.
I view this new FOMC statement as a significant improvement
over the 2020 statement. In "Lessons for the FOMC's Monetary Policy
Strategy" (https://drive.google.com/file/d/1WzqIQYFytg_nOewuMVPCIIxVjlPQ9EAX/view),
a paper I presented in May 2025 at the Fed's 2nd Thomas Laubach Research
Conference, the first lesson I listed was "The operational mandate for unemployment
must be consistent with the operational objective for price stability, i.e.,
the inflation target." Whether expressed in terms of unemployment or
employment, the labor market objective must be consistent with the inflation
objective. The FOMC has done this in its new statement. It says that "The
Committee views maximum employment as the highest level of employment that can
be achieved on a sustained basis in a context of price stability."
Another lesson discussed in my paper was that a policy
framework should not be tailored to a particular economic environment. The strategy
should be designed to work well as the economic environment evolves. This is
now recognized in the new statement, which describes the FOMC's strategy as
"designed to promote maximum employment and price stability across a broad
range of economic conditions."
While the new statement does represent an improvement, the
FOMC has missed the opportunity to address three other weaknesses with the 2020
statement. First, until 2020, the statements discussed the price stability
(inflation) objective first, the employment mandate second. This made sense as
monetary policy can generally determine inflation in the longer-run, while maximum
employment is not directly measurable (unlike inflation) and is determined primarily
by nonmonetary factors. The 2020 statement reversed the order in which these
objectives were discussed. The 2025 statement maintains this order, discussing
the goal the FOMC can’t control first, and only then the objective it can
control.
Second, the new statement does not completely distance the
FOMC from the asymmetric preferences reflected in the 2020 statement with its excessive
focus on conditions in which inflation would be too low and its suggestion that
an employment boom would not necessarily elicit a policy response. Instead, it
states that “employment may at times run above real-time assessments of maximum
employment without necessarily creating risk to price stability.” This, at least,
allows the FOMC to react if employment growth does create a risk to price
stability.
Third, the new statement fails to link its assessment of
maximum employment to any quantifiable metric. Prior to the 2020 statement, the
FOMC referred to the longer-run unemployment rate provided in the quarterly Summary
of Economic Projections as offering some information about the Committee’s
assessment of longer-run employment. By not providing any way for the public to
assess the FOMC’s views on maximum employment, the FOMC’s policy framework
still lacks the clarity that would characterize a fully transparent monetary
policy strategy.
