Did the Federal Reserve's 2020 Policy Framework Limit Its Response to Inflation? Evidence and Implications for the Framework Review

ABSTRACT: We analyze monetary policy documents to examine what role the new policy framework adopted by the Federal Reserve in 2020 and its implementation played in the slow response of policy to the inflation of 2021–2022. We show that the two changes that are most explicit in the new framework—moving to flexible average inflation targeting and not responding to employment above its "maximum" level—had little impact. However, two changes that were more subtle—moving away from preemptive policy actions and, especially, strengthening and elevating the employment side of the dual mandate—played significant roles. We conclude by discussing implications for the Federal Reserve's upcoming framework review.