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04.06.21

How Did Professional Forecasters React to the Fed’s New Flexible Average Inflation Targeting Strategy?

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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.

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The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia. For more information, go to www.clevelandfed.org or follow us on Facebook, Twitter, Instagram or LinkedIn.

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