The Federal Reserve’s monetary policy framework: The 2025 review

By Warren Hrung
ABA DataBank

The Federal Reserve recently released an update to its Statement on the Longer-Run Goals and Monetary Policy Strategy following a review of its monetary policy strategy, tools and communications. These reviews are scheduled to occur roughly every five years. The Fed was explicit that its 2 percent target for inflation would not be a focus of the review.

This DataBank summarizes the main changes to the statement from the 2025 review. ABA has provided a members-only tracker of the changes in the statement as well as a members-only tracker of the changes compared to the last iteration of the 2012 statement, as the new statement is arguably more closely aligned with the 2012 statement. This monetary policy strategy provides insight into how the Fed works towards achieving its  dual mandate of price stability and maximum employment.

Notable statement revisions

A prior DataBank summarized changes to the statement from the 2019-2020 review, which instituted a goal of achieving the inflation target on average over time and focused on shortfalls from maximum employment. These changes arguably contained an upside inflation bias.

Given the sustained inflation rates above target since the 2019-2020 review (Figure 1), it is not surprising that the updated statement no longer contains any reference to a goal of “inflation that averages 2 percent over time.”  The focus is now back to a reaffirmation of the 2 percent inflation rate target. Relatedly, the discussion of how anchoring longer-term inflation expectations at 2 percent helps foster price stability is now supplemented with a declaration that the Fed “is prepared to act forcefully” to keep inflation expectations anchored.

For the employment mandate, the updated statement no longer contains any reference to “shortfalls of employment from its maximum level.” Instead, the updated statement makes a point of defining maximum employment as “the highest level of employment that can be achieved on a sustained basis in the context of price stability” and now notes a “balanced approach” when employment and inflation objectives are not complementary. The updated statement also recognizes that employment may exceed its maximum level “without necessarily creating risks to price stability.”

Given the wide range of inflation and unemployment rates since the COVID-19 pandemic (Figures 1 and 2), it is perhaps not surprising that the updated statement adds text on meeting the dual mandate “across a broad range of economic conditions.” The updated statement also still contains a reference to the effective (zero) lower bound despite the current federal funds rate target range being well above the effective lower bound, even after the 25 basis point rate cut at the Federal Open Market Committee’s Sept. 16-17, 2025 meeting (Figure 3).

Conclusion

The Fed’s 2025 review of its monetary policy framework factored in the experience since the 2019-2020 review, most notably the rate of inflation that still remains above the Fed’s target. However, the updated framework is not simply a return to an earlier iteration. While elements of the framework with a plausible upward inflation bias were removed, the statement now contains a stronger emphasis on inflation expectations and is now arguably more flexible and applicable to a wider set of economic conditions than earlier versions.