What to expect when you’re expecting a Fed framework review

Every few years, the Federal Reserve takes stock of its long-term strategy goals. There’s no set schedule for it, but in an August speech, Federal Reserve Chair Jerome Powell said the Fed would begin the process of reviewing its Statement on Longer-Run Goals and Monetary Policy Strategy “later this year” and “will be open to criticism and new ideas.”

Carola Binder, an associate professor of economics at the University of Texas at Austin and author of a book on the history of price shocks in the United States, spoke with “Marketplace” host Kai Ryssdal about the Fed’s most recent framework review, in 2020, and what we can expect from the next one. 

Kai Ryssdal: Remind everybody what happened the last time the Fed did its framework review?

Carola Binder: Sure. So the last time the Fed did its framework review, we were right in the midst of the COVID pandemic, and the Federal Reserve went around the country on a series of “Fed Listens” events. So they got advice and information from all sorts of different types of people, like labor unions, consumer representatives, their own economists, and from economists outside of the Federal Reserve System. And when that was all concluded, what they did was make their inflation target into what’s called an average inflation target. So the idea was, if they miss their target from below, then they’re going to make up for it from above.

Ryssdal: And the upshot, if I recall, was that they said in almost as many words, but not literally, as many words, we’re going to let the economy run hot for a little while, because we’ve been undershooting inflation, and we need to get it back up there. 

Binder: That’s exactly right. So inflation had been below 2% for a very long time. All the groups they talked with said what we really want is a full employment economy. We want to, you know, let things run hot a little bit, err on that side, rather than worry about inflation that might rise in the future. That’s why they made the makeup target asymmetrical. They weren’t promising to make up for overshoots, just promising to make up for undershoots.

Ryssdal: It has been, as we all know, four very long years, since the last framework review. What do you anticipate this one might look like whenever it may start and it’s going to be soonish, we just don’t know when, right?

Binder: Right. So I think they are going to revisit the same changes they made at the last one. I think they’ll want to at least say, “Look, we made this change to average inflation targeting. How did this framework serve us during the pandemic?” Obviously, inflation went way above target. But also, you know, inflation’s come back down without a big recession, and I think they’re going to be grappling with like that asymmetry that I mentioned, where, like, they make up for low inflation, but they don’t make up for high inflation. That’s going to be a big issue that they will be talking about at the next framework reveal.

Ryssdal: What about the idea of a 2% inflation target? I’ve asked, I think Rafael Bostic in Atlanta. I might have even asked Powell himself, why don’t you just say, “you know, we’re targeting two-and-a-half percent now and call it a day, declare victory and depart the field.” And they’re like, “no, no, no, we can’t do that.” Do you think they’ll revisit? 

Binder: No —

Ryssdal: OK, you’re a no as well.

Binder: I think 2% is pretty sacrosanct for the Fed, that if they were to change it, and especially if they were to change it now, while inflation was above target, it would come off as them being, you know, opportunistic. This definitely wouldn’t be the time for it when people have just felt how painful inflation can be for the Fed to say, well, we’re going to actually go for higher inflation. 

Ryssdal: Yeah, OK. One more, how the Fed communicates. We’ve talked a lot on this program, and everybody else who watches the Fed has talked a lot about how the Fed communicates, their efforts at transparency and trying to make people understand what they do. I will quote, however, Brookings’ publication on the Federal Reserve [framework review], and it goes like this. Quote: “If you give a normal person a choice of reading a Fed statement or watching a Fed press conference or watching cat videos on YouTube, they’re going to choose the cat videos almost every time.” I would just say they’re going to choose the cat videos all the time. What, if anything, do you think the Fed ought to do about its communication?

Binder: Well, you know, if people are going to choose the cat videos every time, what that tells you is that people don’t really want to have to spend that much of their time worrying about what the Fed’s doing. So that kind of tells you that the best thing the Fed can do for the public is keep things pretty stable, pretty predictable, so that we don’t have to watch the Fed videos. But I mean, I do think there is a duty that they do communicate with the public what they’re doing and why, so that we can evaluate whether they actually do what they say they’re going to do, and whether it’s consistent with what they’ve been mandated by Congress to do. 

Ryssdal: Last framework review, four years ago, it was pretty seismic. Are you thinking it’s going to be as big this time?

Binder: I’m guessing not. I think that this probably isn’t the time when they want to introduce something seismic. I think they would rather say, “Look, we had a really hard episode here. We’re on kind of surprisingly strong ground today. Let’s take the win, but also take some lessons from it.” I don’t think they’re going to want to make major changes at this point.