The devolution of federal reserve monetary policy strategy, 2012–24

Abstract The Federal Open Market Committee's 2012 Statement on Longer‐Run Goals and Monetary Policy Strategy interprets the Federal Reserve's dual mandate in light of the natural rate hypothesis and the New Keynesian “divine coincidence.” It sets a quantitative objective for inflation but not unemployment and acknowledges that the goals of price stability and maximum employment are generally complementary. The FOMC began deviating from these principles in December 2012, however, and the Committee's 2020 amended Strategy Statement appears to reflect, instead, the older view that the Phillips curve describes an exploitable trade‐off between inflation and unemployment. To bring its strategy back in line with the lessons of contemporary macroeconomic theory, the FOMC could simply abandon the 2020 amendments and return to its original 2012 framework. Alternatively, the Committee could eliminate the asymmetries and ambiguities that prevent its new strategy from having the desirable properties of a true price level targeting scheme.