The Fed's New Framework 3
2025 09 16
The Fed’s New Framework is a series of reflections on where Fed policy is going by looking at what a number of others have said, namely, Claudia Sahm,(1) Robin Brooks, Victor Constancio, Scott Sumner, David Beckworth, Veronique De Rugy and Claudia Sahm (2)
The Fed’s New Framework-1 looked at Claudia Sahm and in The Fed’s New Framework-2, Robin Brooks and Victor Constancio. In this post I consider Market Monetarist perspectives of David Beckworth, “Have Your Cake and Eat It Too: The Fed’s 2025 Framework”
My initial intention was to summarize before commenting on Beckworth, but it turned into a wished-for Q&A, which is to say, only Q’s.
As a roadmap to what follows, Beckworth sees the new framework as an abandonment of Flexible Average Inflation Targeting (FAIT) [as FAIT abandoned Flexible Average Inflation Targeting (FIT) in 2020], and its replacement with a “New” FIT (my terminology) unlike the pre-2020 “Old” FIT. Beckworth approves of the change, but still finds the New FIT lacking compared to a FIT “anchored” to NGDP, compared, in fact, to NGDP targeting.
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Beckworth claims that the Fed “effective[ly] abandon[ed] FAIT in early 2022, when [it] pivoted aggressively to contain surging inflation.”
Q One Doesn’t targeting a forward looking average (or even a backward looking average) imply that a central bank would at some point pivot from inflating to deflating, even “aggressively?”
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New FIT is like the Old FIT but with some holdover of FAIT by, “yet still keeping the option to deploy its zero lower bound tools in a future crisis."
There seem to be four regimes in play here.
1. Old FIT
2. FAIT that replaced Old FIT.
3. New FIT that replaced FAIT (back in 2022?).
4. NGDP "anchored" FIT ought to replace New FIT
Q Two What does each regime commit the Fed to do/not to do that the others do not?
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Beckworth: “In effect, the Fed is trying to have it both ways: a “return to basics” with [the New FIT], yet still keeping the option to deploy its zero lower bound tools in a future crisis. It is a clever balancing act, but one that risks backfiring. The more the Fed presents this framework as both simpler and crisis-ready, the greater the chance that communication becomes muddled and credibility erodes, depending on how and by whom it is put into practice want to highlight the potential communication and credibility challenges the new framework creates, which I will outline in the sections that follow.”
Q Three Are C&C problems the distinguishing feature of one regime over another?
And
Q Four How did Old FIT imply NOT deploying its ZLB tools? QE WAS deployed in 2009, well before FAIT. Why does the targeting regime affect the instrument package?
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Beckworth highlights a FAIT => New FIT change
"First, the FOMC got rid of the effective lower bound (ELB) focus of the 2020 statement and now aspires to have a framework that is robust to “a broad range of economic conditions”:
The Committee's monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions…"
Q Five How is promoting maximum "employment and stable prices across a broad range of economic conditions" anything but the Fed’s mandate? Don't Old FIT, FIAT New FIT, and NGDP-anchored FIT, all four regimes aim for that?
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About New FIT Beckworth asks, “Does the “full range of tools” also include make-up policy for its inflation target?”
Q Six A policy is a tool?”
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Beckworth: “A second change, then, is that make-up policy went from being at the forefront of the inflation targeting framework to silently lurking in the shadows of its toolbox
Q Seven “Tool” or not, what is the practical difference between make up policy “being at the forefront of the inflation targeting framework [in FAIT] to silently lurking in the shadows” [of New FIT”
And does “flexibility” in any of the regimes not imply that conditions might warrant more than “make up” inflation?
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Beckworth: “A third change is that the asymmetric “shortfalls” from maximum employment language has been dropped …,”
Q Eight Why was that “asymmetric?” Any deviation from a maximum is a “shortfall.” The New Framework language, “…employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability” only seems to rule out mistaken under estimates of “maximum” employment.
Would any modern central bank disinflate because of “excess employment” irrespective of inflation? Would that not be to go back to “Philips Curve” concepts which were superseded by inflation targeting?
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Beckworth: “On the one hand, [the Fed] proclaims a robust monetary policy strategy that is meant to withstand a broad range of economic conditions. On the other hand, the Fed cannot let go of its long-standing fear of the [Effective Lower Bound], so it keeps the door cracked open for unconventional tools”
Q Nine Does not “monetary policy strategy that is meant to withstand a “broad range of economic conditions” require using “broad range” of conventional and unconventional tools?
Beckworth: “Similarly, while it officially jettisons the language of make-up policy that once defined FAIT, the references to acting “forcefully” and using the “full range of tools” leave make-up policy lurking in the background as an unspoken option.”
Q Ten In Beckworth’s conception, was commitment to make up inflation (with a commitment to no more than make up?) what set FIAT apart from Old FIT?
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Beckworth then turns to discussing the ambiguity of New FIT.
“This rhetorical balancing act—compounded by undefined terms such as maximum employment, full range of tools, and act forcefully—may preserve flexibility, but it also invites excessive discretion, confusion, and communication challenges that could undermine the framework’s effectiveness.
…
Still, that ambiguity comes at a cost. By leaving so much room for interpretation, the framework makes it easy for a future FOMC to reinterpret and reshape monetary policy in ways that may diverge sharply from the current committee’s intent.
For example, in the face of a negative supply shock, such as a disruption to commodity supply that raises prices, the Fed's vague pledge to 'act forcefully' could lead a more hawkish-leaning FOMC to tighten policy too aggressively. Rather than looking through a temporary burst of inflation that monetary policy cannot control, such a committee might treat the rhetoric of forceful action as a license to hike rapidly, sacrificing employment gains and deepening the downturn. History shows the danger of this inflation-myopia: in 2008 the Fed was slow to ease even as the economy unraveled because headline inflation, driven by oil, remained elevated driven by oil, remained elevated"
Q Eleven Fair enough about decisions made in July 2008. But can this explain the failure to act MUCH more vigorously in September? TIPS was under target by mid-August. EFFR was above TIPS in mid-September and not zeroed until November. QE in pre-announced limits did not begin until January 2009. Can oil prices cannot explain that?
And
Q Twelve On the issue of "delay," isn’t current Fed practice of even hinting much less dot plotting future unconditional movements in policy instruments counterproductive and likely to lead to inertia instead of being fully “data driven?” Likewise isn’t it unwise to create expectations of serial correlation of movements in excess of serial correlation of the data? Shouldn’t each decision incorporate all the information available?
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More on ambiguity:
“For example, in the face of a negative supply shock, such as a disruption to commodity supply that raises prices, the Fed's vague pledge to 'act forcefully' could lead a more hawkish-leaning FOMC to tighten policy too aggressively.
Q Thirteen Although almost any statement coud be interpreted in many differed ways, Is this a good example? The “act forcefully” to keep expectations anchored language was to replace a "commitment" to make up for below-target inflation. There was never SFAIK a commitment to make up for over-target inflation.
Are not this paragraph and the next are just a rules vs discretion point?
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And finally, the pitch for NGDP targeting which indeed does descend from Milton Friedman’s advocacy of monetary aggregate targeting
"The Fed could honor [Milton Friedman’s] spirit by anchoring its flexible inflation target to a stable growth path for nominal income."
Q Fourteen Could the Fed not use market indicators to “anchor” policy with FAIT, too? For example, it could have started disinflating in September 2021 when TIPS went over target.
And
Q Fifteen Whether Old FIT, FIAT, New FIT or NGDP-anchored FIT, ought not the Fed to be able to consult real time market expectations of Nominal and real GDP with a suite of TIPS and Trillionths?
There may be no answers, but stay tuned for the next exciting episode of “The Fed’s New Framework!”
Image prompt:
A person giving directions to another who is doubtful or incredulous. [Beckworth is not necessarily so jolly, but I’ll take it. 😊]
[Standard bleg: Although my style is know-it-all-ism, I do not deny that I can be mistaken or overstate my points. I also know there is an amazing range of views and experiences among readers. Bring those to bear by commenting on these posts. Both other readers and I will benefit.]