Why the Fed Has a New Framework and Why It Matters

In August 2020, the U.S. Federal Reserve rolled out a new approach to monetary policy. At the time, the U.S. economy was reeling from the coronavirus pandemic and the Fed was still focused on its aggressive response to that collapse. But the new framework has taken on greater importance as growth has returned. Under the new strategy, the labor market will be allowed to run hotter, and that could help lower-income workers and members of minority groups who sometimes haven’t fully benefited from periods of economic growth.

The Fed’s job is to manage the economy to produce both price stability and full employment; its main tool is an interest rate it raises to slow economic activity and lowers to stimulate it. It made changes in the framework it uses to judge when to take action in response to both inflation and labor market trends.