The US Federal Reserve (Fed) has launched one of the most comprehensive reviews of its monetary policy framework in decades, recognising that the world’s most influential central bank is operating in an economy that has changed fundamentally from the one for which its existing policy framework was designed.

Rapid advances in artificial intelligence (AI), persistent inflation, geopolitical tensions, fragmented global supply chains and increasingly volatile financial markets are challenging many of the assumptions that have guided monetary policy since the 2008 global financial crisis.

At the same time, the long-standing dominance of the US dollar as the world’s single reserve currency is facing more scrutiny than at any point in recent memory as countries seek greater diversification away from a system that leaves much of the global economy exposed to US policy decisions.

To prepare for this new environment, new Fed Chair Kevin Warsh has assembled five independent task forces comprising leading economists, former central bankers, business executives and technology experts to examine key aspects of its operations, including inflation, policy communications, labour markets, financial stability and the use of economic data. The review is intended to help the Fed adapt its policymaking framework to structural changes that are reshaping the global economy rather than merely responding to temporary economic fluctuations.

Monetary policy can no longer be based solely on domestic inflation and employment indicators

The exercise is significant because it reflects growing recognition that the economic landscape has changed more rapidly than conventional monetary models anticipated. For decades, central banks relied on relationships between inflation, unemployment, interest rates and economic growth that appeared relatively stable.

Many of those relationships have weakened in recent years. For example, as a speaker at the Pakistan Banking Association’s summit last week said, AI can help economies grow at a fast pace without generating jobs. The broader international monetary system has also become more contested, with the dollar’s unrivalled position increasingly seen by some countries as a vulnerability.

These developments suggest that monetary policy can no longer be based solely on domestic inflation and employment indicators. Central banks increasingly need to account for technological change, geopolitical fragmentation, climate risks and financial market behaviour when assessing future inflation and economic growth. They also need to recognise that the global financial order is becoming less dependent on a single currency, even if the dollar remains dominant for now.

The gradual push by some economies to reduce reliance on the dollar reflects not only strategic caution but also frustration with a system in which US monetary policy can transmit shocks across borders.

The minutes of the Fed’s June meeting underscored a shift from ending its tightening cycle to ensuring inflation does not reaccelerate. While policymakers kept interest rates unchanged at 3.50-3.75 per cent for a fourth consecutive meeting, they warned that geopolitical tensions, trade policies and AI-driven demand for energy, semiconductors and skilled labour could keep inflation elevated.

With prospects of early rate cuts fading, higher US interest rates are likely to strengthen the dollar, tighten global financial conditions, and intensify pressure on emerging economies such as Pakistan, where Fed decisions often shape capital flows, exchange rates, borrowing costs, and investor sentiment as much as domestic policy does.

The Fed review comes at a time when the long-standing supremacy of the US dollar is being questioned more openly as countries look for alternatives to a reserve system that concentrates too much power in one currency and one economy. Whether the review ultimately produces sweeping reforms or only incremental adjustments, it signals that the era of relatively predictable monetary policymaking is giving way to one that is more uncertain.

For countries whose economic fortunes remain closely tied to global financial conditions, preparing for that new environment will require stronger domestic institutions and more resilient economic foundations.

Although Pakistan has recently made progress in restoring macroeconomic stability under the International Monetary Fund-supported reform programme, its economic foundations remain fragile. Exports continue to lag regional competitors, foreign direct investment is modest, and workers’ remittances have become the principal source of external financing.

Unlike economies with diversified export bases, stronger external balances and deeper financial markets, Pakistan remains highly exposed to shifts in global liquidity and investor sentiment because of its narrow export structure, reliance on remittances and external borrowing, and shallow capital markets.

The Fed’s review also carries an important lesson for policymakers in developing economies.e As the global economy becomes increasingly driven by technology and data, central banks can no longer rely exclusively on backwards-looking indicators or conventional forecasting models. Investment in statistical capacity, digital infrastructure, high-frequency economic data and analytical capability is becoming an essential component of effective monetary policymaking.

For Pakistan, strengthening economic resilience ultimately depends less on anticipating every policy shift in Washington than on improving domestic fundamentals. Expanding exports, attracting productive investment, broadening the tax base, strengthening financial markets and raising productivity would reduce the economy’s vulnerability to external shocks while creating greater policy flexibility at home.

Published in Dawn, The Business and Finance Weekly, July 13th, 2026