Board of Governors of the Federal Reserve System

August 22, 2025

A Roadmap for the Federal Reserve's 2025 Review of Its Monetary Policy Framework

Sylvain Leduc, Anna Paulson, Trevor Reeve, and Stacey Tevlin^*

Context and Scope

The Federal Reserve's first formal, public review of its monetary policy framework (MPF) was completed in 2020 and included a plan to review monetary policy strategy, tools, and communication practices roughly every five years.¹ The review conducted in 2025 thus constituted the Fed's first five-year review of its MPF.² Like the 2019–20 review, the 2025 review included three key elements and incorporated feedback from a range of stakeholders. First, a series of Fed Listens events sponsored by Federal Reserve Banks gathered perspectives from across the country on how the Fed's approach to monetary policy affects families, businesses, and communities.³ Second, the Thomas Laubach Research Conference, held at the Federal Reserve Board on May 15–16, 2025, provided timely academic perspectives on the Federal Reserve's monetary policy goals, tools, strategy, and communications.⁴ And, third, deliberations of the Federal Open Market Committee (FOMC) occurred at five consecutive FOMC meetings, supported by a series of Federal Reserve staff papers. This article introduces the series of 10 staff papers and lays out the work that was presented to FOMC participants between January and June 2025. The FOMC continued its discussions at the July 2025 meeting, leading to the approval of a revised Statement on Longer-Run Goals and Monetary Policy Strategy. The revised statement was released to the public on August 22, 2025, as explained by Chair Powell in a speech delivered the same day.⁵

The FOMC first released its Statement on Longer-Run Goals and Monetary Policy Strategy in 2012.⁶ This statement (hereafter, consensus statement) has evolved over time in response to the evolution of the economy and the implications for monetary policy. The 2012 consensus statement effectively adopted flexible inflation targeting as the Committee's policy framework, notably introducing the explicit 2 percent longer-run inflation goal. This statement was also intended to improve the effectiveness of monetary policy by making it more transparent and predictable.

From 2012 to 2018, the Committee reaffirmed its consensus statement at each January meeting, usually without substantive changes.⁷ That practice changed with the Committee's first public review of its MPF in 2019–20, which instituted regular reviews at roughly five-year intervals. As a result of that review, the Committee made significant revisions to its consensus statement.⁸ The 2020 consensus statement included changes that explicitly addressed effective lower bound (ELB) risks and indicated that policy decisions would be informed by assessments of "shortfalls" rather than "deviations" from maximum employment, reflecting the pre-pandemic experience of a long expansion characterized by historically low unemployment as well as low and stable inflation. Moreover, to further enhance the anchoring of longer-term inflation expectations, the 2020 consensus statement adopted a flexible form of average inflation targeting following periods in which inflation had run persistently below the 2 percent objective.

Not long after the adoption of the 2020 consensus statement, the predominant policy concern became inflation that was far too high as a result of the unprecedented shifts in demand and supply induced by the COVID-19 pandemic. Although the 2020 consensus statement was oriented toward a low interest rate, low-inflation world, there was nothing in that framework that prevented the Committee from responding forcefully to restore price stability—as was amply demonstrated by the Committee's actions.

Against this backdrop, a key focus of the 2025 review was to reconsider aspects of the 2020 Statement on Longer-Run Goals and Monetary Policy Strategy in light of the experience of the past five years as well as over a broader time span. As described in the next section, the series of staff papers was designed to take stock of the lessons learned about the behavior of the labor market and inflation and assess the lessons for monetary policy. A key focus of this work was to identify elements of monetary policy strategies that are robust to a broad range of economic conditions. As in 2020, the 2025 review took as given the FOMC's previously articulated longer-run inflation goal of 2 percent.

The 2019–20 review included discussions of whether to expand the FOMC's toolkit in order to be able to provide sufficient policy accommodation when the federal funds rate is constrained by the ELB. The result of those discussions was an endorsement of the tools that had been deployed since the Global Financial Crisis, including explicit forward guidance and asset purchases. As expanding the toolkit has not been a recent focus for monetary policy, the 2025 review did not delve deeply into this topic.

Roadmap

The first set of staff papers, delivered to the FOMC in advance of the January 2025 FOMC meeting, focused mainly on establishing some common background and identifying areas of focus. "The Origins, Structure, and Results of the Federal Reserve's 2019–20 Review of Its Monetary Policy Framework" provides important background on the economic and monetary policy developments that informed the Committee's framework deliberations and decisions over time, with particular focus on the results of the 2019–20 review. "Reviews of Foreign Central Banks' Monetary Policy Frameworks: Approaches, Issues, and Outcomes" presents a cross-country comparison of framework reviews, which is particularly relevant given that most advanced-economy central banks have grappled with similar issues in recent decades.

The second set of papers, delivered in advance of the March 2025 FOMC meeting, focused on labor market dynamics and the employment side of the Federal Reserve's dual mandate. "Assessing Maximum Employment" provides assessments of key labor market indicators and examines concepts of maximum employment. While noting that there are different concepts of maximum employment, the paper focuses on the highest level of employment that can be sustained while maintaining price stability, a concept that has been used by Federal Reserve policymakers in the past. Because the level of maximum employment is not directly observable, the paper also reviews different labor market indicators that can help assess it. It notes that the unemployment rate remains a key cyclical indicator of labor market performance, but that other indicators, such as job vacancies or the employment-to-population ratio, can also provide complementary evidence to get a more comprehensive view of the state of the labor market. "Labor Market Dynamics, Monetary Policy Tradeoffs, and a Shortfalls Approach to Pursuing Maximum Employment" discusses considerations around mitigating employment "shortfalls" and how following such an approach may affect labor market and inflation outcomes over time. The paper highlights that a policy strategy mechanically focusing on employment shortfalls from maximum employment tends to reduce the likelihood of hitting the ELB but also generates modestly greater inflationary pressures than strategies responding to deviations from maximum employment. It also emphasizes that in the presence of nonlinearities, such as those arising because of supply constraints, this policy strategy can give rise to rapid increases in inflation, and policymakers focusing on employment shortfalls may want to respond forcefully to nascent inflationary pressures.

The third set of papers, distributed to the Committee in advance of the May 2025 FOMC meeting, examined the price-stability side of the dual mandate. "Retrospective on the Federal Reserve Board Staff’s Inflation Forecast Errors since 2019" provides a detailed assessment of the factors that contributed to staff forecasts that missed the magnitude and persistence of the inflation surge during the pandemic and its aftermath. It also draws lessons for inflation forecasting from that episode. For instance, the paper highlights that alternative measures of economic slack, such as the vacancy-to-unemployment ratio, and forecasting frameworks that allow for nonlinearities may be useful in forecasting inflation in the future. However, the paper also notes that, given the extraordinary nature of the pandemic, factors that proved useful in forecasting inflation during that period may be less so in more normal times.

Complementing this background assessment, "Inflation since the Pandemic: Lessons and Challenges" reviews the key drivers of inflation over the past five years. As the paper argues, the pandemic and the recovery from it, including the effects of policy responses, led to large and persistent imbalances between supply and demand across the U.S. economy. These imbalances contributed to the high inflation rates experienced during the pandemic and the following recovery. While short-term inflation expectations rose rapidly as inflation picked up in 2021 and during the first half of 2022, longer-term inflation expectations remained well anchored, which likely helped contain the inflationary burst. "Pandemic and War Inflation: Lessons from the International Experience" brings a cross-country perspective to these issues. It notes that despite differences in MPFs, inflation surged in most advanced and emerging market economies, in a context of large demand–supply imbalances and strong fiscal and monetary policy support. As in the U.S., short-term inflation expectations surged, but longer-term ones experienced little fluctuation. These similar cross-country experiences point to the global nature of the high inflation during the pandemic, suggesting a less critical role for idiosyncratic factors and different policy responses across countries.

To more directly examine the implications for MPFs, "Implications of Inflation Dynamics for Monetary Policy Strategies" reviews considerations associated with a flexible average inflation–targeting (FAIT) strategy as compared with a flexible inflation-targeting (FIT) strategy in the context of macroeconomic models that feature both demand and supply shocks. While FAIT can provide better macroeconomic performance relative to FIT when the policy rate is constrained by the ELB, this performance gap is largely eliminated when policymakers operating under FIT also use appropriately calibrated explicit forward guidance. The performance gap also decreases when the ELB risk is less prevalent—for instance, when there is a greater likelihood of inflationary shocks or a higher neutral level of interest rates. The paper also discusses that in the presence of temporary cost-push shocks that create a tension between the central bank's objectives by raising inflation and lowering economic activity, the optimal monetary policy follows a balanced approach that takes into account the upward inflation deviations from target and the negative output gap.

The final set of papers, delivered in advance of the June 2025 FOMC meeting, addressed issues related to risks and uncertainties in the context of monetary policy deliberations and communications. "Accounting for Uncertainty and Risks in Monetary Policy" reviews the forms and measurement of risks and uncertainties most relevant for monetary policy. "Monetary Policy, Uncertainty, and Communications" discusses the design and communication of monetary policy from a risk-management perspective and examines approaches to designing policy strategies that are robust to a broad range of economic conditions, given the high level of uncertainty that policymakers typically face. Both of these papers address the potential benefits and costs of using alternative scenarios as a monetary policy communication tool.

Overall, these analytical contributions from the Federal Reserve staff, coupled with the papers presented at the Thomas Laubach Research Conference and the series of Fed Listens events, provided useful information to policymakers that helped guide their review of the previous policy strategy and the adoption of the 2025 Statement on Longer-Run Goals and Monetary Policy Strategy.

References

Altig, David, Jeff Fuhrer, Marc P. Giannoni, and Thomas Laubach (2020). "The Federal Reserve's Review of Its Monetary Policy Framework: A Roadmap," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, August 27.

Bauer, Michael, Travis Berge, Giuseppe Fiori, Francesca Loria, and Molin Zhong (2025). “Accounting for Uncertainty and Risks in Monetary Policy,” Finance and Economics Discussion Series 2025-073. Washington: Board of Governors of the Federal Reserve System, August.

Bundick, Brent, Isabel Cairó, and Nicolas Petrosky-Nadeau (2025). “Labor Market Dynamics, Monetary Policy Tradeoffs, and a Shortfalls Approach to Pursuing Maximum Employment,” Finance and Economics Discussion Series 2025-068. Washington: Board of Governors of the Federal Reserve System, August.

Chung, Hess, Callum Jones, Antoine Lepetit, and Fernando M. Martin (2025). “Implications of Inflation Dynamics for Monetary Policy Strategies,” Finance and Economics Discussion Series 2025-072. Washington: Board of Governors of the Federal Reserve System, August.

Foote, Christopher, Shigeru Fujita, Amanda Michaud, and Joshua Montes (2025). “Assessing Maximum Employment,” Finance and Economics Discussion Series 2025-067. Washington: Board of Governors of the Federal Reserve System, August.

Garga, Vaishali, Edward Herbst, Alisdair McKay, Giovanni Nicolò, and Matthias Paustian (2025). “Monetary Policy, Uncertainty, and Communications,” Finance and Economics Discussion Series 2025-074. Washington: Board of Governors of the Federal Reserve System, August.

Gordon, Grey, Julio Ortiz, and Benjamin Silk (2025). “Reviews of Foreign Central Banks’ Monetary Policy Frameworks: Approaches, Issues, and Outcomes,” Finance and Economics Discussion Series 2025-066. Washington: Board of Governors of the Federal Reserve System, August.

Gourio, François, Benjamin K. Johannsen, and David López-Salido (2025). “The Origins, Structure, and Results of the Federal Reserve’s 2019–20 Review of Its Monetary Policy Framework,” Finance and Economics Discussion Series 2025-065. Washington: Board of Governors of the Federal Reserve System, August.

Hajdini, Ina, Adam Shapiro, A. Lee Smith, and Daniel Villar (2025). “Inflation since the Pandemic: Lessons and Challenges,” Finance and Economics Discussion Series 2025-070. Washington: Board of Governors of the Federal Reserve System, August.

Lipińska, Anna, Enrique Martínez García, and Felipe Schwartzman (2025). “Pandemic and War Inflation: Lessons from the International Experience,” Finance and Economics Discussion Series 2025-071. Washington: Board of Governors of the Federal Reserve System, August.

Peneva, Ekaterina, Jeremy Rudd, and Daniel Villar (2025). “Retrospective on the Federal Reserve Board Staff’s Inflation Forecast Errors since 2019,” Finance and Economics Discussion Series 2025-069. Washington: Board of Governors of the Federal Reserve System, August.