Fed’s 2025 Review | Foreign Central Bank Lessons

Why the Fed Is Conducting a 2025 Review — and Why It Matters Now

The Federal Reserve’s ongoing 2025 monetary policy framework review represents more than routine institutional maintenance—it’s a critical recalibration following one of the most challenging periods in modern central banking history. As a follow-up to the comprehensive 2019-2020 review, this assessment examines the Fed’s Statement on Longer-Run Goals and Monetary Policy Strategy, its policy tools, and communication practices in light of the pandemic and subsequent inflation surge.

What makes this review particularly significant is its explicit scope. Unlike some foreign counterparts that have reconsidered their numerical inflation objectives, the Fed has clearly stated that the 2 percent longer-run inflation goal is not under review. This distinction immediately narrows the focus to operational framework elements: how the Fed pursues its dual mandate, which tools it employs, and how it communicates uncertainty to markets and the public.

The timing is crucial. This review comes as central banks globally grapple with lessons from the 2021-2023 inflation episode, supply chain disruptions, and the limits of conventional economic modeling. A comprehensive analysis of eight foreign central bank reviews—spanning institutions from the Bank of Canada to the European Central Bank—reveals patterns that directly inform what the FOMC might consider as it shapes U.S. monetary policy for the next half-decade.

The stakes extend beyond academic interest. The Fed’s framework decisions influence everything from mortgage rates and employment levels to global financial stability. Understanding how peer institutions have navigated similar crossroads provides essential context for anticipating the Fed’s strategic direction and its implications for markets, businesses, and households.

Periodic Reviews Have Become a Global Central Banking Standard

What was once an occasional exercise has crystallized into systematic practice across advanced economies. The normalization of roughly five-year framework reviews represents a fundamental shift in central banking culture, moving from static doctrine to adaptive governance. Today, four major advanced economy central banks—the Bank of Canada, European Central Bank, Reserve Bank of New Zealand, and Sweden’s Riksbank—conduct reviews at approximately five-year intervals, establishing a clear international precedent that the Fed now follows.

The practice originated with Canada’s pioneering approach starting in 2001, but gained significant momentum after the Global Financial Crisis and accelerated dramatically following the pandemic. Only the Swiss National Bank among major advanced economy central banks has not conducted a comprehensive framework review in the past decade, making it the notable exception rather than the rule.

This institutionalization of periodic assessment reflects several converging forces. First, the complexity and interconnectedness of modern economies demand regular recalibration of policy frameworks. Second, the effective lower bound environment that persisted through much of the 2010s forced central banks to innovate rapidly, creating a need for systematic evaluation of new tools and approaches. Third, the pandemic and subsequent inflation surge exposed gaps in conventional wisdom that demand structural attention rather than ad hoc adjustments.

The reviews themselves follow varied approaches. Four were initiated by the central banks themselves (Bank of England, Bank of Japan, ECB, Norges Bank), two by governments (Reserve Bank of Australia, Riksbank), and two jointly (Bank of Canada, RBNZ). Three employed external expert panels, three conducted internal assessments, and two used mixed approaches. This diversity in methodology reflects different institutional contexts while converging on the core principle that frameworks must be regularly examined and updated.

Two Eras of Reviews: Pre-Inflation vs Post-Inflation Focus

The 2021-2022 global inflation surge creates a sharp dividing line in central bank framework reviews, fundamentally altering both the questions asked and the solutions proposed. Reviews conducted before this period focused primarily on low interest rate environments, effective lower bound constraints, and the adequacy of unconventional tools for providing accommodation. Reviews conducted afterward shifted dramatically toward lessons from pandemic policy responses, forecasting failures, and the challenge of communicating policy under extraordinary uncertainty.

Pre-2021 reviews operated under the assumption that the primary challenge facing central banks was generating sufficient inflation to reach target levels. The ECB’s comprehensive strategy review, launched in early 2021, initially focused on whether its inflation aim was ambitious enough and whether its tools were adequate for sustained accommodation. The emphasis was on credibly committing to higher inflation over time and overcoming deflationary pressures that had persisted since the Global Financial Crisis.

The post-inflation review landscape tells a completely different story. Central banks found themselves grappling with how their frameworks had failed to predict or prevent the most significant inflation surge in decades. The focus shifted to supply-side modeling inadequacies, the fragility of inflation expectations anchoring, and the communication challenges of explaining policy pivots to surprised markets and publics.

This temporal split has direct relevance for the Fed’s 2025 review. While the FOMC began its current assessment as inflation was declining from peak levels, the evaluation must address both the low-inflation challenges that motivated the 2020 framework changes and the high-inflation lessons that followed. The tension between these two experiences—one calling for more aggressive accommodation tools, the other highlighting the risks of accommodation persistence—defines much of the analytical challenge the Fed currently faces.

Foreign experience suggests this dual focus creates complex trade-offs. Reviews must balance the need for tools to address deflationary pressures against the risks of overstimulation. They must weigh communication clarity against the flexibility needed to respond to unpredictable shocks. Most fundamentally, they must reconcile the framework’s promises with its performance under stress—a challenge that no central bank has fully resolved.

The Inflation Target Evolution Debate

Among the most closely watched aspects of recent central bank reviews has been the treatment of numerical inflation objectives. The experience reveals both dramatic evolution and notable conservatism, with outcomes that carry significant implications for the Fed’s approach to its 2 percent target. The European Central Bank’s transformation stands as the most dramatic example: evolving from “below 2%” (pre-2003) to “below, but close to 2%” (2003) to a fully symmetric “two per cent over the medium term” (2021).

This ECB evolution represents more than semantic adjustment—it reflects a fundamental shift from asymmetric to symmetric inflation tolerance. The pre-2003 framework embedded an upward bias that prioritized price stability over accommodation. The 2003 refinement acknowledged the costs of excessive disinflation while maintaining clear boundaries. The 2021 change embraces symmetry, explicitly accepting temporary overshoots to compensate for previous undershoots—precisely the logic that influenced the Fed’s 2020 framework changes.

Australia’s Reserve Bank took a different but significant approach, shifting emphasis to the midpoint of its 2-3 percent range while dropping the vague “on average, over time” language that had created communication challenges. This change clarified the bank’s practical operating target while maintaining range flexibility—an approach that balances precision with adaptability.

Perhaps more significant than the changes, however, is the conservatism displayed by most central banks. Five institutions—the Bank of Canada, Bank of Japan, Norges Bank, Reserve Bank of New Zealand, and Sweden’s Riksbank—explicitly affirmed their existing numerical targets. This pattern suggests that while framework evolution is common, numerical target changes remain exceptional and require compelling justification.

The ECB’s ongoing review provides another instructive example. Despite being the institution most willing to adjust its inflation objective, the current review explicitly excludes revisiting the symmetric 2 percent target adopted in 2021—a notable narrowing of scope that suggests even the most reform-minded central banks recognize limits to frequent numerical adjustments. This experience reinforces the Fed’s decision to exclude the 2 percent goal from its 2025 review, focusing instead on operational framework elements.

For market participants and policy observers, the key insight is that numerical targets, once established, tend to persist even as operational frameworks evolve. The emphasis shifts from questioning the destination to improving the journey—exactly the approach the Fed appears to be taking in its current review.

The Dual Mandate Debate: Employment as a Co-Equal Goal

The treatment of employment objectives in recent central bank reviews reveals growing skepticism about dual mandates, creating potential challenges for the Fed’s distinctive approach to balancing price stability and maximum employment. Among major advanced economy central banks, only Australia’s Reserve Bank currently treats maximizing employment as co-equal to price stability, directly paralleling the Fed’s dual mandate structure. This isolation has become more pronounced following New Zealand’s recent policy shift.

New Zealand’s experience offers a particularly relevant case study. The Reserve Bank of New Zealand operated under a dual mandate from 2018 to 2023, explicitly required to consider both price stability and maximum sustainable employment in its decisions. However, following the central bank’s review, the New Zealand government removed the employment objective in late 2023, stating that it would “ensure monetary policy decision makers are focused primarily on the achievement of price stability.”

The rationale behind New Zealand’s change illuminates broader concerns about dual mandates. The review found that the employment objective was poorly understood by the public, creating communication challenges similar to those experienced by the Reserve Bank of Australia. Focus groups conducted during the RBA’s review revealed that “most were unfamiliar with the employment objective,” despite its formal inclusion in the bank’s mandate. This public confusion complicates monetary policy communication and potentially undermines the effectiveness of policy transmission.

Other major central banks maintain what might be termed “hierarchical” mandates, where employment considerations are secondary to price stability. The Bank of Canada, Bank of England, ECB, Norges Bank, and Riksbank all treat employment as important but subordinate, using medium-term policy flexibility to support employment when conditions warrant but not as a co-equal objective.

The Bank of Canada’s approach exemplifies this hierarchical structure. Following its 2021 review, the bank clarified that it “will continue to use the flexibility of the 1 to 3 percent control range to actively seek the maximum sustainable level of employment when conditions warrant.” This language preserves employment consideration while maintaining clear primacy for price stability—a framework that provides some employment focus without the communication complexities of co-equal objectives.

For the Fed, these international experiences raise important questions about dual mandate communication and effectiveness. While the Fed’s employment objective enjoys stronger historical and legislative foundation than recent dual mandate experiments elsewhere, the foreign experience suggests potential benefits to clarifying the relationship between the two goals, particularly in explaining how conflicts between price stability and employment are resolved in practice.

Flexibility Over Rigidity: Why Central Banks Rejected Makeup Strategies

One of the most significant patterns emerging from recent central bank reviews is the widespread rejection of rigid makeup strategies, including average inflation targeting and price-level targeting. This consensus against formulaic approaches has direct implications for the Fed’s evaluation of its own flexible average inflation targeting framework adopted in 2020. The evidence suggests central banks consistently favor operational flexibility over mechanical rules, even when those rules promise theoretical benefits.

The Bank of Canada’s analysis provides the most comprehensive rationale for this preference. Using model simulations, laboratory experiments, and public consultations, the bank concluded that its existing flexible inflation-targeting framework could “mimic the benefits of these strategies without the drawbacks.” This finding suggests that skilled discretionary policy can capture the advantages of makeup strategies—such as stronger recession responses and better expectation anchoring—without binding policymakers to potentially costly mechanical commitments.

The European Central Bank’s approach to makeup elements illustrates the nuanced middle ground many central banks have adopted. While acknowledging that “some makeup element may be appropriate” when constrained by the effective lower bound, ECB President Christine Lagarde clearly stated that the bank is not pursuing formal average inflation targeting. This stance allows for compensatory policy responses without rigid averaging requirements that might force inappropriate actions during future economic conditions.

Australia’s Reserve Bank reached perhaps the strongest conclusion against alternative frameworks, determining there was “insufficient evidence that alternative frameworks would outperform flexible inflation targeting in practice.” This assessment reflects a broader skepticism about the real-world performance of theoretical alternatives, particularly given the complexity of communication and implementation challenges they create.

The pattern of rejection extends beyond specific technical concerns to fundamental questions about central bank credibility and communication. Rigid makeup strategies require complex explanations of why temporary policy deviations serve longer-term objectives. They demand sustained commitment across changing economic conditions and personnel. Most challenging, they can require policy actions that appear inappropriate for current conditions in service of historical compensation requirements.

For the Federal Reserve, which adopted a form of flexible average inflation targeting in 2020, these international experiences raise important questions. The Fed’s framework explicitly avoids mechanical averaging, instead committing to “seek to achieve inflation that averages 2 percent over time.” This language preserves discretion while signaling makeup intentions—an approach that aligns with the flexibility preference evident in foreign reviews.

The key insight from international experience is that effective makeup behavior may be more important than formal makeup commitments. Central banks appear to believe they can deliver appropriate compensation for past deviations through judgment and communication rather than binding rules. Whether this belief proves correct under stress remains an open question that the Fed’s review must consider, particularly given recent BIS research on makeup strategy effectiveness.

Unconventional Tools: Affirmed but with Growing Caution

Central bank reviews have generally affirmed the value of unconventional monetary policy tools while expressing increased caution about their design, sequencing, and exit strategies. The experience with forward guidance, large-scale asset purchases, negative interest rates, yield curve control, and term lending facilities has produced a more nuanced understanding of these tools’ capabilities and limitations. For the Fed, which deployed many of these tools aggressively during the pandemic, the international experience offers valuable lessons about both their promise and their pitfalls.

Interest rate setting has been reaffirmed as the primary tool by multiple central banks, with unconventional measures explicitly positioned as supplements rather than substitutes. This hierarchy emerged clearly from reviews despite the extensive use of alternative tools during crisis periods. The message is that while unconventional tools are essential crisis responses, they should not displace conventional policy as the primary transmission mechanism when circumstances permit.

The Bank of Japan’s assessment of its large-scale monetary easing program provides sobering perspective on asset purchase effectiveness. The bank concluded that “large-scale monetary easing since 2013 did not have as large an upward effect on prices as originally expected, partly because it was not easy to influence expectations.” This candid evaluation suggests that asset purchases, while providing important financial accommodation, may have more limited direct impact on inflation expectations and outcomes than initially hoped.

Australia’s experience with yield curve control offers perhaps the most cautionary tale from recent unconventional tool deployments. The Reserve Bank maintained its yield curve control policy from March 2020 through November 2021, targeting three-year government bond yields. However, the review concluded that the policy was “deployed without thorough assessment” and that its “disorderly exit” damaged the bank’s credibility with market participants. This experience highlights the importance of clear exit strategies and the risks of maintaining artificial yield targets when market conditions change.

Forward guidance has received more positive assessments, though with important caveats about flexibility and conditionality. The Bank of Japan noted that forward guidance “can be effective” but emphasized the importance of designing guidance to be “conditioned on forecasts” rather than calendar dates, allowing adaptation as economic outlooks change. This experience suggests that state-contingent rather than time-dependent guidance provides better balance between commitment and flexibility.

Four central banks—the Bank of Japan, ECB, Reserve Bank of New Zealand, and Sweden’s Riksbank—explicitly maintained negative interest rates in their policy toolkits despite mixed experiences with their implementation. However, the reviews generally reflected increased awareness of negative rates’ side effects on financial sector profitability and market functioning, suggesting more cautious future deployment.

Perhaps most significantly, multiple reviews acknowledged that sequencing issues for policy normalization “do not seem to be settled,” in the words of Sweden’s Riksbank review. The question of whether to end asset purchases before or after raising rates, how quickly to reduce balance sheets, and how to coordinate multiple tool adjustments remains an area of ongoing uncertainty that the Fed must navigate in its own framework considerations.

Forecasting Crisis and Uncertainty Communication

The widespread failure to predict the 2021-2023 inflation surge has triggered a fundamental reassessment of central bank forecasting capabilities and methodologies. Former Fed Chair Ben Bernanke’s comprehensive review of the Bank of England’s forecasting performance, along with similar assessments by other central banks, reveals systemic limitations in conventional economic modeling that have profound implications for monetary policy frameworks. These findings directly challenge assumptions about central banks’ ability to anticipate and respond to economic developments.

Bernanke’s report delivered particularly sharp criticism of traditional forecasting tools, recommending the elimination of fan charts due to their “weak conceptual foundations” and finding that they “convey little information” while receiving “little public attention” from the public. The limitations extend well beyond presentation formats to fundamental modeling structures. The Reserve Bank of Australia’s review acknowledged that its models “include little detail on the economy’s supply side, including how inflation passes through supply chains.”

Perhaps most humbling has been the recognition that forecasting failures were widespread rather than isolated institutional problems. Both the Bank of England and Reserve Bank of Australia reviews explicitly noted that outside forecasters and other central banks similarly missed the inflation surge. This pattern suggests systematic rather than idiosyncratic modeling limitations that require structural rather than tactical responses.

The Shift to Scenario-Based Communication

Alongside forecasting model improvements, the movement away from fan charts toward alternative scenario analysis represents one of the most concrete communication reforms emerging from recent central bank reviews. This shift reflects growing recognition that traditional uncertainty visualization tools may obscure rather than illuminate the genuine risks facing monetary policy.

Sweden’s Riksbank review described alternative scenarios as “a way to deal with the problem of time inconsistency of policy forecast/commitment especially in times of high uncertainty.” This perspective highlights a crucial insight: scenarios can acknowledge uncertainty without creating the false precision problems that plague traditional confidence intervals. Rather than suggesting that central banks can quantify the probability of different outcomes, scenarios can explore the implications of different possibilities.

The Bernanke report’s recommendation to replace fan charts with “a dedicated section on uncertainty and balance of risks” reflects this broader shift in communication philosophy. Instead of attempting to visualize probability distributions that may have little empirical foundation, central banks can focus on identifying key uncertainties and exploring their policy implications. This approach may be more honest about the limits of economic forecasting while providing more useful guidance about potential policy responses.

Multiple reviews have also emphasized the importance of tailoring communications to different audiences rather than attempting one-size-fits-all approaches. The recommendation to publish varying levels of complexity for technical versus general audiences acknowledges that effective communication requires audience-appropriate content rather than universal simplification or complexity.

The practical implementation of scenario-based communication varies significantly across institutions. Some central banks have developed formal scenario templates that examine upside and downside risks to baseline projections. Others have integrated scenario thinking into regular policy communications without formal structural changes. The diversity of approaches reflects ongoing experimentation with how to balance analytical rigor with communication effectiveness.

For the Federal Reserve, which has utilized fan charts and other uncertainty visualization tools in its communications, the international experience suggests potential benefits to reconsidering these approaches. The Fed’s Summary of Economic Projections and other forecasting communications might benefit from greater emphasis on scenario analysis and more explicit acknowledgment of forecasting limitations.

The key insight from foreign experience is that uncertainty communication should illuminate rather than obscure the genuine challenges facing policy makers. Traditional approaches that suggest false precision may undermine rather than enhance public understanding of monetary policy decisions. The shift toward scenarios represents an attempt to preserve analytical rigor while improving communication honesty about the inherent uncertainty surrounding economic developments.

Governance Reforms, Financial Stability, and Policy Boundaries

Among all the reforms emerging from recent central bank reviews, Australia’s governance restructuring stands as the most dramatic institutional change. The creation of a new monetary policy board structure—featuring the governor, deputy governor, Treasury secretary, and six external members—represents a fundamental reimagining of central bank decision-making that goes far beyond technical framework adjustments. The Australian government’s adoption of these recommendations in November 2024 makes this restructuring the most concrete governance reform to emerge from the current review cycle.

The new structure addresses several concerns identified in the review process. The inclusion of six external members aims to broaden the perspectives brought to monetary policy decisions, reducing the risk of groupthink that can develop in more insular institutional settings. The Treasury secretary’s inclusion represents an unusual bridge between fiscal and monetary authorities, though one that raises questions about central bank independence that other jurisdictions may be reluctant to replicate.

Other central banks have addressed groupthink concerns through less dramatic structural changes. The Bank of Canada and Bank of England have emphasized the importance of avoiding insular decision-making without restructuring their governance arrangements, focusing on procedural and cultural changes rather than institutional reorganization.

Financial Stability and Climate Considerations

Beyond governance questions, recent central bank reviews have grappled extensively with questions about monetary policy’s appropriate scope, particularly regarding financial stability considerations and climate change objectives. These discussions reveal fundamental tensions about whether central banks should pursue objectives beyond their traditional price stability and employment mandates.

Financial stability considerations have received widespread attention, with several reviews noting that macroprudential tools may have limitations that require monetary policy flexibility. The Swedish Riksbank and Reserve Bank of New Zealand both identified specific concerns about expansionary monetary policy driving unsustainable house price increases, while Norway’s central bank highlighted risks of financial imbalance buildup during extended accommodation periods.

These financial stability concerns create complex trade-offs for monetary policy frameworks. Strict adherence to price stability objectives might require maintaining accommodation that exacerbates financial imbalances. Conversely, leaning against financial imbalances might require monetary policy tightening that conflicts with inflation or employment objectives. The reviews have generally avoided prescriptive solutions to these dilemmas, instead emphasizing the need for case-by-case judgment and coordination with macroprudential authorities.

Climate change considerations have produced even more divergent approaches across central banks. Three institutions—the Reserve Bank of Australia, Norway’s central bank, and the Bank of Canada—explicitly stated that monetary policy cannot provide targeted climate responses. Their position emphasizes that monetary policy works through broad aggregate demand channels that are ill-suited to addressing sector-specific or structural economic challenges like climate transition.

In contrast, the European Central Bank and Sweden’s Riksbank have advocated for incorporating climate considerations into their asset purchase programs and other policy tools. The ECB’s approach involves tilting asset purchases toward bonds issued by companies with better climate performance, while the Riksbank has integrated sustainability considerations into its investment policies.

These divergent approaches reflect different interpretations of central bank mandates and capabilities. Institutions that embrace climate considerations argue that climate risks pose systemic threats to financial stability and economic growth that fall within their purview. Those that reject climate targeting contend that monetary policy tools are too blunt to address climate challenges effectively and that such efforts risk compromising primary mandate objectives.

The debate extends beyond technical capabilities to fundamental questions about democratic legitimacy and central bank independence. Critics of expanded mandates argue that addressing climate change requires political choices about costs and benefits that unelected central bank officials should not make. Supporters counter that climate risks are economic facts rather than political preferences and that central banks must address them to fulfill their existing mandates effectively.

For the Federal Reserve, which operates under a clear dual mandate without explicit financial stability or climate objectives, these international debates provide important context for considering how to address these issues within existing frameworks. The Fed must balance acknowledgment of financial and climate risks with maintenance of focus on its primary price stability and employment objectives.

Implications for the Fed’s 2025 Review: A Synthesis

The comprehensive examination of eight foreign central bank reviews provides crucial insights for understanding the challenges and opportunities facing the Federal Reserve’s ongoing 2025 framework assessment. The international experience reveals both convergent trends and persistent disagreements that will likely influence the FOMC’s conclusions. Most fundamentally, the reviews demonstrate that framework evolution is both necessary and complex, requiring careful balance between adaptation and stability.

The Fed’s decision to exclude the 2 percent inflation target from review aligns with the conservative approach taken by most foreign central banks. While the ECB’s dramatic evolution toward symmetry demonstrates that numerical targets can change, the broader pattern shows that most institutions affirm existing targets while adjusting operational approaches. This suggests the Fed’s focus on framework implementation rather than numerical objectives follows international best practice.

The widespread rejection of rigid makeup strategies by foreign central banks raises important questions about the Fed’s flexible average inflation targeting approach. While the Fed’s framework avoids the mechanical averaging that other central banks rejected, the international experience suggests benefits to emphasizing flexibility over formulaic approaches. The Fed may need to clarify how its averaging commitment operates in practice and how it balances historical compensation against current economic conditions.

Perhaps most challenging is the employment mandate question. New Zealand’s removal of its employment objective and the communication difficulties experienced by Australia highlight potential vulnerabilities in dual mandate approaches. While the Fed’s dual mandate enjoys stronger historical and legal foundations than recent experiments elsewhere, the international experience suggests benefits to clearer communication about how conflicts between price stability and employment objectives are resolved.

The forecasting crisis revealed by international reviews has direct implications for Fed communications and decision-making processes. The widespread failure to predict the inflation surge suggests systematic modeling limitations that likely affected the Fed as well. The movement toward scenario-based rather than probabilistic uncertainty communication may offer improvements for Fed transparency about forecast limitations and policy risks.

On unconventional tools, the international experience suggests general affirmation with increased caution about design and exit strategies. Australia’s problematic yield curve control exit and Japan’s limited success with large-scale easing provide cautionary lessons for Fed tool deployment. The emphasis on maintaining conventional policy as the primary transmission mechanism aligns with the Fed’s own approach to tool hierarchy.

The governance reforms undertaken by Australia represent the most dramatic structural changes emerging from recent reviews, but their relevance to the Fed remains unclear given different political and institutional contexts. The emphasis on avoiding groupthink and incorporating diverse perspectives may be achievable through procedural rather than structural changes for the Fed.

Looking forward, the Fed’s 2025 review conclusions will likely reflect this international consensus around evolutionary rather than revolutionary change. Framework adjustments that enhance flexibility, improve communication, and acknowledge uncertainty appear more probable than fundamental restructuring of objectives or approaches. The key will be learning from foreign experience while adapting lessons to American institutional and economic contexts.

The stakes extend well beyond technical monetary policy considerations. The Fed’s framework decisions influence global financial conditions, international monetary coordination, and the broader credibility of central bank independence. Getting the balance right between evolution and stability will require careful synthesis of international lessons with distinctly American economic and political realities.