Author(s): Working Group on the 2025 Federal Reserve Monetary Policy Framework Review
Year: 2025
Pages: 39
ISBN: 1-56708-190-8

The report, chaired by William C. Dudley, Senior Advisor at the Griswold Center for Economic Policy Studies at Princeton University and former President of the Federal Reserve Bank of New York, examines the Federal Reserve’s monetary policy framework in advance of the 2025 review and makes recommendations for how the Fed adjusts it in pursuit of its dual mandate of maximum employment and price stability, as well as how it communicates and operationalizes these goals.
 
The report considers the 2020 framework review, particularly the adoption of a flexible average inflation targeting (FAIT) regime, to identify necessary changes. Designed for a low-inflation, low-growth environment, the framework was poorly suited to the post-pandemic economic rebound. The Fed’s delayed response to surging inflation in 2021 and 2022, worsened by inaccurate forecasts and continued asset purchases despite overheating conditions, highlighted the need for a more adaptable and clearly communicated policy approach.
 
To strengthen the robustness of the Fed’s framework, the report highlights several key lessons. It emphasizes the importance of policy tools and objectives that can respond effectively to both inflationary and disinflationary pressures, the critical role of clear and credible communication in shaping market expectations, and the need for a structured, transparent framework governing quantitative easing (QE) and quantitative tightening (QT).
 
The Working Group offers six recommendations to enhance the framework’s effectiveness:
 
1. Replace the FAIT regime with a traditional inflation targeting system, maintaining the 2 percent target with flexibility in timing.
 
2. Revert to an employment objective that is consistent with achieving the inflation target.
 
3. Provide explicit guidance on how trade-offs between employment and inflation objectives will be handled.
 
4. Develop a comprehensive, transparent framework to assess the costs and benefits of QE and QT programs.
 
5. Publish staff forecasts, including alternative scenarios, after each FOMC meeting.
 
6. Create and publicly release a formal structure for the use of forward guidance.
 
In addition to these recommendations, the report proposes several further reforms outside the scope of the formal 2025 review. These include replacing the federal funds rate with the interest rate on reserves as the Fed’s primary policy tool, modifying bank capital rules such as the supplementary leverage ratio (SLR) to avoid unintended constraints during QE, and more systematically integrating monetary policy with financial supervision and stability concerns, particularly in light of the 2023 banking crisis. Finally, the report supports maintaining the 2 percent inflation target to preserve the Fed’s credibility and the anchoring of inflation expectations.
 
The report advocates for a more robust, transparent, and flexible monetary policy framework that can respond to a wider range of economic conditions while reinforcing the central bank’s commitment to stability, credibility, and effectiveness.
 

To read the full press release on the report, click here.

To watch a recording of the G30 Special Report Webinar, please click here.

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