Monetary Policy Through the Lens of Market-Based Inflation

Some goods and services prices are not directly observed and must be indirectly derived for measuring inflation. This nonmarket-based inflation category has been an important factor keeping headline inflation elevated over the past two years. Because indirectly deriving prices introduces measurement uncertainty, one monetary policy approach would be to focus solely on directly observable prices. Applying this through a well-known monetary policy rule suggests a notably lower federal funds rate. However, other rules that account for the implicit uncertainty that policymakers face would leave the federal funds rate essentially unchanged.