Bessant hinted at the Fed's future direction:

# U.S. Treasury Secretary Yellen Hints at Major Overhaul of Fed’s Policy Framework

U.S. Treasury Secretary Janet Yellen has recently signaled that the Federal Reserve’s policy framework may be in for a major revamp, including replacing the fixed inflation target with an **inflation target range** and scrapping the much-watched interest rate "dot plot". She argued that the central bank should narrow the scope of its economic interventions, return to a more traditional behind-the-scenes role, and achieve more effective policy coordination with the Treasury Department.

During a discussion on the *All In* podcast released on December 23, Yellen emphasized that it would be unwise to adjust the inflation target before inflation is clearly brought back to 2%—a move that could undermine the central bank’s credibility. However, she made clear that once inflation is under control, she supports the introduction of a "target range" (e.g., 1.5%-2.5% or 1%-3%). She noted that the economic system is more akin to "biology" than physics or mathematics, and that pursuing pinpoint precision to the decimal place is absurd.

Furthermore, she revealed that current acting Federal Reserve Governor Kevin Miran may return to the White House as early as February or March—a timeline that the market interprets as coinciding with the decision window for nominating the next Fed Chair.

Yellen went on to point out that the incoming Fed Chair may consider abolishing the "dot plot" included in the quarterly Summary of Economic Projections, a tool that has long been used to guide market expectations on interest rate trends. She listed potential candidates such as Kevin Warsh, Kevin Hassett, and Chris Waller, all of whom tend to favor narrowing the Fed’s remit. Their goal is to reduce the market’s over-interpretation of every word uttered by central bank officials, making the policy-making process more predictable.

## Proposing an Inflation Target Range and Scrapping the "Dot Plot"

Yellen has cast doubt on the Fed’s existing inflation targeting framework. While she acknowledged that the 2% inflation target is an established benchmark, and that hastily adjusting it while inflation remains above this level would be seen as "cheating"—thus eroding the central bank’s credibility—she argued that the future direction should be a more flexible target range. She pointed out that markets and economies are non-linear, complex systems, and that anchoring policy to a precise numerical value does not align with the realities of economic operation.

On the topic of policy communication tools, Yellen was critical of the "dot plot". She implied that with the upcoming leadership transition at the Fed, this long-standing market bellwether could be phased out. The aim of this change is to reduce the market’s over-reliance on the central bank’s short-term interest rate forecasts, allowing the Fed’s policy intentions to be transmitted more directly and clearly.

In addition, Yellen mentioned the current pool of candidates under consideration for the Fed Chair position, including Warsh, Hassett, and Waller. She noted that these candidates generally seek to downsize the Fed’s institutional scale and functions, and put an end to the so-called "gain-of-function" monetary policy—moving away from the central bank’s role as the undisputed protagonist on the economic stage.

## Calling for the Fed to Reduce Its "Visibility" and Return to the Background

Yellen was highly critical of the quantitative easing (QE) policies implemented by the Fed over the past decade-plus, referring to QE as an "engine of inequality". She argued that the Fed’s prolonged asset purchases have artificially inflated asset prices, widening the wealth gap between asset owners and ordinary wage earners.

In Yellen’s view, large-scale asset purchases should be limited to emergency crisis-fighting tools—similar to the Bank of England’s short-term interventions during market turmoil or the traditional role of acting as a "lender of last resort" to provide liquidity. They should not be used to maintain a bloated balance sheet over the long term. She pointed out that the Fed is now incurring annual losses of around $100 billion due to bond purchases made at high prices, a stark contrast to the days when central banks regularly remitted profits to the Treasury.

Yellen advocated for the Fed to shed its complex "three-headed monster" role—simultaneously setting interest rates, conducting balance sheet operations, and overseeing financial regulation. She expressed hope that the Fed of the future would be a predictable institution operating behind the scenes, rather than a source of constant market volatility that requires the market and the American people to scrutinize every word it utters.

## The Fed Should Support the Treasury Department

When discussing the relationship between fiscal and monetary policy, Yellen cited the Bundesbank model and argued that the Fed should coordinate more closely with the Treasury. She proposed that if the Treasury can demonstrate resolve and results in deficit control, the Fed should "pave the way for fiscal consolidation" by lowering interest rates.

On the fiscal front, Yellen projected that the U.S. economy will enjoy a "boom" in 2026, and she is committed to reducing the budget deficit-to-GDP ratio to the 3% level. She stated that 2025 is a year to "set the table"—laying the groundwork for future growth through a series of policy adjustments. She emphasized that tariff policy is not only a tool for balancing trade, but also a means of safeguarding national security. Citing research from the Federal Reserve Bank of San Francisco, she noted that tariffs actually have an anti-inflationary effect.

For the future economic outlook, Yellen painted a vision of "Wall Street and Main Street" integration. Through the implementation of "Trump accounts"—which would provide every newborn American child with a $1,000 investment starter fund—the initiative aims to popularize equity ownership and improve financial literacy across the nation. Meanwhile, the Treasury will work to relax regulations on community banks, unlocking their ability to provide credit support to small and medium-sized enterprises and the agricultural sector, thereby driving broader economic prosperity.

**Source**: Wall Street CN

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