The Fed’s Strategic Approach to Monetary Policy Needs a Reboot

Abstract: This paper assesses the evolution of the Fed's original strategic plan established in 2012 to its new strategic plan in 2020, how that framework contributed to monetary policy mistakes and high inflation, and suggests critical issues the Fed should consider in its upcoming strategic review. The Fed's excessive concerns about the risks of falling inflationary expectations and effective lower bound led it to establish asymmetries in its inflation and employment mandate that favored higher inflation and prioritized employment. In its upcoming strategic review, we suggest the Fed conduct basic research on the inflation process and how it is affected by monetary policy, correct the asymmetries of the 2020 strategic plan, consider systematic rules, abandon forward guidance as an independent policy tool, and improve its quarterly Summary of Economic Projections.

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