How Did Professional Forecasters React to the Fed’s New Flexible Average Inflation Targeting Strategy?
In August 2020 the Federal Open Market Committee (FOMC) adopted new approaches to its inflation and employment objectives, with the inflation objective involving a shift to a flexible average inflation-targeting (FAIT) regime. In this Economic Commentary, Federal Reserve researchers examine the extent to which the shift to a FAIT regime has affected longer-run inflation expectations. Specifically, the researchers focused on changes in a measure of expectations from the US Survey of Professional Forecasters.
The data suggest that, compared to the FOMC’s 2012 announcement of an inflation objective, the FOMC’s 2020 announcement generated more of an immediate effect on inflation expectations. The researchers find that there is a noticeable upward shift among low (below 2 percent) inflation expectations and a stronger anchoring of expectations around the 2 percent inflation objective that cannot be attributed to composition effects.
“We find evidence that is consistent with intended effects of the change in the monetary policy framework. Moreover, there is little evidence to suggest the impact of the announcement is understated due to anticipatory effects,” say the researchers. “It is, however, important to draw upon the lessons from the 2012 announcement that indicate the effects of that policy played out over several years rather than only in one quarter.”
Read the Economic Commentary.
Federal Reserve Bank of Cleveland
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