The Federal Open Market Committee begins a two-day meeting today. Whatever it decides tomorrow, the more consequential question hanging over this one is not the rate but the framework — the strategy document governing how the Committee pursues its mandate, which the Chair criticised directly in congressional testimony two weeks ago.
Framework questions get far less coverage than rate decisions and matter considerably more, because a framework determines the response to every future situation rather than to this one.
What was adopted in 2020
Under conventional inflation targeting, a central bank aims at its target from wherever inflation currently sits. Past misses are bygones. If inflation undershot last year, the objective this year remains 2 percent — the shortfall is not made up.
Flexible average inflation targeting changed that in one direction. Following periods when inflation ran below target, the Committee would aim for inflation moderately above 2 percent for some time, so that the average over a longer window came out at target.
A second change accompanied it. The employment side of the mandate was reframed around shortfalls from maximum employment rather than deviations in either direction — meaning a labour market running hotter than the Committee’s estimate of full employment would not, by itself, justify tightening.
The problem it was designed to solve
The framework was a response to a decade of persistent undershooting, and the reasoning was coherent.
Inflation had run below 2 percent for most of the preceding decade. Policy rates had spent extended periods near zero, which meant conventional easing had limited room in a downturn. And there was a specific concern about expectations: if the public comes to expect inflation persistently below target, those expectations feed into wage and price setting and become self-fulfilling, dragging actual inflation lower still.
Promising to make up shortfalls was intended to break that. It committed the Committee to tolerating an overshoot, which — if believed — raises expected inflation and provides stimulus without cutting rates further.
The asymmetry was deliberate. The framework promised to make up undershoots and said nothing about making up overshoots, because overshooting was not the problem anyone was solving for.
The criticism
The framework was adopted in August 2020. Within eighteen months the inflation environment had reversed entirely.
Three lines of criticism follow, and they are of different strengths.
- It was calibrated to the wrong problem. A framework designed to combat persistent undershooting was in force when inflation overshot substantially. This is the strongest version of the criticism, and it is partly an observation about timing rather than design.
- The asymmetry delayed the response. A committee that has publicly committed to tolerating an overshoot has, at minimum, a communication difficulty when it wishes to stop tolerating one. How much this actually delayed tightening is genuinely contested.
- The shortfalls language removed a trigger. Under the previous framework, a labour market running beyond estimated full employment was itself a reason to consider tightening. The 2020 revision removed that, on the reasonable ground that estimates of full employment had proved unreliable.
The defence is worth stating too. No framework anticipates every shock, and the inflation of the following years had substantial supply-side causes that a different framework would not have prevented. Judging a framework by the shock that happened to follow it is a form of hindsight — and the undershooting problem it was built for was real.
Why this is the live question
Inflation has now been above the 2 percent objective since 2021. A framework built on the premise that the persistent risk is inflation being too low is, at the least, describing a world that no longer exists.
The deeper issue is credibility. The strength of any inflation target lies in expectations — what businesses assume when setting prices and what workers assume when negotiating wages. A target missed for five years invites the conclusion that it is aspirational. Once that belief takes hold, restoring it requires actually suppressing demand rather than announcing an intention, and that is expensive in employment terms.
This is the argument for treating framework revision as urgent rather than academic, and it is the substance behind the Chair’s call for a change of approach.
What would have to happen
A framework change is not a decision a chair can make. The strategy statement is adopted by the Committee, and the periodic reviews that produce revisions involve staff analysis, public consultation and internal negotiation over an extended period.
The signals worth watching are therefore procedural rather than rhetorical:
- Whether a formal review is announced, and on what timetable.
- Whether the makeup-strategy language is dropped from the statement of longer-run goals.
- Whether “shortfalls” reverts to “deviations” in the employment mandate — a single word carrying substantial content.
- Whether the longer-run dot moves in the quarterly projections, indicating a reassessment of the neutral rate rather than the near-term path.
None of that will be settled this week. The decision announced tomorrow, and the vote behind it, is the nearer-term test of whether the Chair’s stated position commands a majority — and the vote is a fact where the rhetoric is not.
