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Flexible Average Inflation Targeting and Inflation Expectations: A Look at the Reaction by Professional Forecasters

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  • Kristoph Naggert
  • Robert W. Rich
  • Joseph Tracy

Abstract

This Commentary examines the response of longer-run inflation expectations to the FOMC’s August 2020 announced switch to a flexible average inflation-targeting (FAIT) regime. The data indicate an upward shift in the lower end (below 2 percent) of the distribution of inflation expectations and a stronger anchoring of expectations around the 2 percent inflation objective following the announcement, evidence that is consistent with intended effects of the change in the monetary policy framework. To provide context, we also include a retrospective assessment of the response of inflation expectations to the FOMC’s January 2012 announcement of an inflation objective. Lessons from the 2012 announcement suggest that conclusions about the adoption of the FAIT regime should be viewed as tentative. Consequently, we also describe indicators and features of the data to monitor developments going forward.

Suggested Citation

  • Kristoph Naggert & Robert W. Rich & Joseph Tracy, 2021. "Flexible Average Inflation Targeting and Inflation Expectations: A Look at the Reaction by Professional Forecasters," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2021(09), pages 1-7, April.
    • Handle: RePEc:fip:fedcec:90677
    DOI: 10.26509/frbc-ec-202109
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    References listed on IDEAS

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    1. Alan K. Detmeister & Daeus Jorento & Emily Massaro & Ekaterina V. Peneva, 2015. "Did the Fed's Announcement of an Inflation Objective Influence Expectations?," FEDS Notes 2015-06-08-2, Board of Governors of the Federal Reserve System (U.S.).
    2. repec:fip:fedgfn:2015-06-08 is not listed on IDEAS
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    Cited by:

    1. Baumann, Ursel & Darracq Pariès, Matthieu & Westermann, Thomas & Riggi, Marianna & Bobeica, Elena & Meyler, Aidan & Böninghausen, Benjamin & Fritzer, Friedrich & Trezzi, Riccardo & Jonckheere, Jana & , 2021. "Inflation expectations and their role in Eurosystem forecasting," Occasional Paper Series 264, European Central Bank.
    2. Guido Bulligan & Francesco Corsello & Stefano Neri & Alex Tagliabracci, 2021. "De-anchored long-term inflation expectations in a low growth, low rate environment," Questioni di Economia e Finanza (Occasional Papers) 624, Bank of Italy, Economic Research and International Relations Area.
    3. Kristoph Naggert & Robert W. Rich & Joseph Tracy, 2023. "The Anchoring of US Inflation Expectations Since 2012," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2023(11), pages 1-7, July.
    4. Hüpper, Florian & Kempa, Bernd, 2023. "Inflation targeting and inflation communication of the Federal Reserve: Words and deeds," Journal of Macroeconomics, Elsevier, vol. 75(C).

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    Keywords

    inflation; forecasting;

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