Global Economy Risk Assessment
Monetary Policy Frameworks under Scrutiny
By The Better Policy Project | August 31, 2025
The 2025 Jackson Hole Symposium: A Turning Point for Monetary Policy Transparency
Major central bank heads descended on Jackson Hole once again this year. The 2025 Symposium gathered leaders from the Bank of England, the European Central Bank, the Federal Reserve, and the Bank of Japan. The direction of travel for monetary policy frameworks is now clear, greater transparency. Smaller central banks such as the Riksbank, Reserve Bank of New Zealand, and the Czech National Bank have set the standard, what we call FPAS Mark I central banks. For them, transparency means publishing the policy and exchange rate paths consistent with staff assumptions about the economy. Other innovators, including the Central Bank of Armenia, are moving further. By communicating through scenarios rather than a single baseline, they have pioneered FPAS Mark II, a decisive shift toward exposing a healthier range of risks, trade-offs, and policy choices.
Global Economy Risk List
Higher Interest Rate Risks
US tariffs rise by more than expected.
Retaliatory tariffs.
Expansionary fiscal policy in the US, Germany and China.
Restrictive immigration in the US reduces labor supply.
Global equity prices reach new highs, spur a wealth effect.
Inflation expectations may not be well anchored.
Countries with low unemployment prevents wage disinflation.
Geopolitical tensions reduce global oil supply.
OPEC spare capacity falls to historic lows.
Countries allow their currencies to depreciate to partially offset US tariffs.
Fed independence questioned.
Underestimating r star that is on the rise due to AI.
Higher food prices driven by meat prices.
Lower Interest Rate Risks
Global trade slows and the global economy slips into a severe growth recession.
Rerouting China’s exports to the rest of the world at a discount.
Restrictive immigration in the US lowers housing demand.
Crisis in confidence in equity markets from the US economic agenda leading to stagflation.
US fiscal sustainability concerns reach a breaking point.
Consumers lose confidence due to high levels of uncertainty leading to precautionary saving.
China’s property market worsens threatening financial stability.
Increasing non-performing loans in Russia causes a banking crisis.
AI raises potential output and higher unemployment.
Bank of England, Bernanke Review
Ben Bernanke’s independent review highlighted the BoE’s analytical gaps, especially its failure to publish an explicit policy-rate path. Without it, the Bank cannot credibly explain what forces are driving the economy or how it intends to deliver price stability. This level of transparency, long met by FPAS Mark I central banks, is not optional. It is essential for analytical credibility.
Federal Reserve, 2025 Strategic Review
The Fed updated its Statement on Long-Run Objectives, reaffirming the 2% inflation target and refining its definition of maximum employment. Yet its continued use of vague language around “moderate long-term interest rates” could create confusion, particularly in the context of debt sustainability. Importantly, the Fed may be edging toward an FPAS Mark II approach. Bernanke has recommended publishing an abridged version of the Teal Book to reveal staff assessments of the economy and policy trade-offs. The lesson of the past decade is clear, without greater transparency, communication risks becoming tied to a narrow narrative, increasing the chance of policy mistakes.
European Central Bank – The Folly of not Publishing an Endogenous Interest/Exchange Rate Path
The ECB has embraced a scenarios-based approach to its projections, yet because it assumes exogenous paths for interest and exchange rates, it effectively communicates that monetary policy does not matter for the economy. This weakness was less evident when only a baseline forecast was published, but with multiple scenarios it becomes more obvious. For example, shocks such as tariffs can alter the trajectories for GDP and inflation, but since the policy rate and exchange rate are exogenous by assumption, there are no implications for monetary policy. This is problematic for a central bank whose stated purpose is to anchor the economy to an inflation target using its instruments, namely the policy rate.
Source: ECB, the ECB does not illustrate the paths for the interest rate and exchange rate for the alternative scenarios but refer to them as exogenous so we assume it is the same as in the baseline projection.
We apply some macroeconomic consistency to the ECB’s scenarios
If the ECB were an FPAS Mark II central bank they would first refer to their baseline projection as a market reference scenario if it is the macroeconomic scenario that is consistent with what policy path in priced in financial markets and the ECB’s inflation target. Second, the different scenarios they prepared would be called Case A and Case B representing fundamentally different directions that monetary policy could take. In order for that to happen, the interest rate as well as the exchange rate need to be free to adjust endogenously to the different conditions laid out in the alternative scenarios so that monetary policy works to anchor the system back to the ECB’s target.
In Case A, tariffs are assumed to have a weaker negative impact than in the market reference, which improves growth prospects; the opposite holds for Case B.
Inflation rises above the market reference in Case A and below in Case B, but monetary policy responds to bring inflation back to target in 2027.
Source: ECB, BPP
Source: ECB, BPP
The ECB responds with moderately tighter policy in Case A with the terminal rate moving towards 2.5% and in the Case B scenario, the policy rate moves towards 1.5% in 2026 to support sluggish growth and inflation.
The exchange rate operates as a shock absorber in both cases; the Euro appreciates in the more inflationary scenario and weakens in the more disinflationary scenario.
Source: ECB, BPP
Source: ECB, BPP
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