The Fed's Deciding Year: Revisiting Monetary Policy Strategy and Tools in 2025

Forex - Fed policymakers will have more issues to consider regarding whether to adjust interest rates in line with inflation and employment targets in 2025. The central bank will review its monetary policy strategy and tools, as it does every five years.

The previous framework update occurred in 2020, amid the COVID-19 pandemic and following over a decade of persistently low inflation and interest rates just above zero. Today, the U.S. economy is experiencing its most inflationary period since the 1970s, with interest rates significantly above the zero lower bound.

One of the most critical questions in the Fed's 2025 framework review will be whether officials will return to a more traditional inflation targeting approach, aiming for a consistent 2% annual price increase, rather than the more flexible target adopted in 2020.

Additionally, the effectiveness and implementation strategies of monetary policy tools, which include setting benchmark interest rates, buying and selling Treasury bonds and other securities, and providing forward guidance, will also be reviewed. The central bank's communication will be part of the evaluation. Findings may be presented at the Kansas City Fed's Economic Policy Symposium to be held in Jackson Hole, Wyo., in August.

Fed Chairman Jerome Powell stated in November, “We are open to new ideas and critical feedback, and taking into account the lessons learned over the past five years, we will adjust our approach where appropriate to best serve the American people to whom we are accountable.”