ROOM 101 5:30 P.M.

How Durable is the Fed’s 2020 Long-run Monetary Policy Strategy

Charles L. Evans, Former President, Federal Reserve Bank of Chicago (Sept. 2007-Jan. 2023)

In September 2020 the FOMC revised the Fed’s Long-run strategy to shore up its commitment to maintaining an inflation rate averaging 2% over time, while also supporting maximum employment by eliminating employment shortfalls. By explicitly embracing the tactic of allowing inflation to overshoot 2% following significant periods of sub-2% inflation, the FOMC effectively delayed in using a more restrictive policy until inflation exceeded 2%. Many public commentators have interpreted this as eliminating pre-emptive strategies for addressing rising inflation challenges.

Background:

Prior to the pandemic, the Fed’s inflation target was 2 percent and symmetric around the target. After revising the Long-run strategy, the Fed chose to wait for a time until they saw inflation rise above 2 percent to act. Unfortunately, it was not anticipated that there would be sustained upward momentum in inflation, coming from the supply-side in 2021, that would occur alongside increases in demand, and would push inflation well above the acceptable band around the 2% average. The misreading contributed to continued expectations of inflation, ultimately leading to a rapid rise in inflation. Not only did the Fed wait too long to enact more bold increases in the federal funds rate in 2021, but the inaction also allowed the wage-price cycle to gain momentum as expectations of rising wages and hence inflation continued. The inflation rate rose from a 1.2% annual rate in 2020 to 4.7% in 2021 to 8.0% in 2022, well above the targeted average inflation rate of 2%. Bolder moves in the federal funds rate were initiated by Summer 2022 and are continuing today.

Discussion Topics:

Will discuss a reconsideration of the high inflation that occurred in 2021 to the present and what went wrong?
How did the newly adopted LR strategy contribute to this situation?
Challenges for formulating central bank strategies to respond to large supply disruptions.

Registrations are closed

Durable is the Fed's 2020 Long-run Monetary Policy