While it may escape the attention of most Americans, the Fed's framework review is an opportunity for our central bank to recalibrate how it pursues its dual mandate of price stability and maximum employment to create a more robust monetary policy framework that better serves the US economy. After its first framework review, in 2019-20, the Fed adopted the current flexible average inflation targeting framework.
In the coming months, the Fed will conduct its second systematic framework review, offering an opportunity to refine its approach to monetary policy.
While the Fed's monetary policy is sophisticated, its effectiveness depends on the policy framework that guides decision-making in our complex and dynamic economy. The recent economic turbulence has revealed important gaps in the current framework that need addressing. By providing clearer guidance and more robust stabilization properties, NGDP level targeting is an approach that could help the Fed deliver both sustained economic growth and price stability.
The authors of the seven policy briefs linked below demonstrate how the NGDP level targeting approach would strengthen the Fed's ability to fulfill its dual mandate of sustained economic growth and price stability and build upon its current flexible average inflation targeting framework.
By providing clearer guidance and more robust stabilization properties, NGDP level targeting could help the Fed deliver both sustained economic growth and price stability. But what is NGDP level targeting, and why does it matter? David Beckworth provides some answers in the video above. Check it out.
The history of inflation in the United States provides the Fed and other policymakers plenty of lessons for how to more effectively stabilize prices as the economy continues to evolve.
As inflation soars, the Fed’s new monetary regime has faced heavy criticism, but adding a nominal GDP targeting component may help salvage this recently adopted framework.
Understanding the trinity of forces that drove the inflation surge during the pandemic period may provide valuable insights on how to prevent a similar episode in the future.
