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Journal Article
Gasoline Prices Unlikely to Bring Down Inflation in 2023
Gasoline prices can influence inflation both directly (by changing prices at the pump) and indirectly (by shaping consumers’ inflation expectations). Through these channels, gasoline prices have played an important role in the run-up and recent decline in inflation. Although gasoline prices have declined from their all-time highs, they are expected to remain relatively stable in 2023. As a result, gasoline prices are unlikely to deliver further reductions in either inflation or inflation expectations this year.
Working Paper
How Optimal Was U.S. Monetary Policy at the Zero Lower Bound?
The zero lower bound on nominal interest rates can generate substantial downward pressure on longer-term inflation expectations. We use data on interest rate options and inflation compensation to estimate how the probability that the zero lower bound will bind in the future has weighed on inflation expectations in the United States. Over the 2008–19 period, we estimate that the zero lower bound imparted only a small drag on longer-term inflation expectations of around 10 basis points. We argue that the Federal Reserve's forward guidance and large-scale asset purchases largely offset the ...
Working Paper
Inflation Since the Pandemic: Lessons and Challenges
This paper reviews the drivers of the post-pandemic U.S. inflation surge and subsequent decline, including the behavior and role of inflation expectations. The sharp rise in inflation reflected severe imbalances between supply and demand stemming from the shocks of the pandemic and the policy response. Measures of short-term inflation expectations increased alongside realized inflation, especially those of households and firms, which may have contributed to inflation’s persistence through price- and wage-setting behavior. However, measures of longer-term inflation expectations remained ...
Working Paper
Forward Guidance, Monetary Policy Uncertainty, and the Term Premium
We examine the macroeconomic and term-premia implications of monetary policy uncertainty shocks. Using Eurodollar options, we employ the VIX methodology to measure implied volatility about future short-term interest rates at various horizons. We identify monetary policy uncertainty shocks using the unexpected changes in this term structure of implied volatility around monetary policy announcements. {{p}} Two principal components succinctly characterize these changes around policy announcements, which have the interpretation as shocks to the level and slope of the term structure of implied ...
Journal Article
Despite High Inflation, Longer-Term Inflation Expectations Remain Well Anchored
The Federal Reserve’s long-run 2 percent inflation target is intended to prevent periods of high inflation from becoming embedded in longer-term inflation expectations. However, inflation has remained above the Fed’s target for over three years, increasing the risk that longer-term inflation expectations could become unanchored. Building on our previous research, we study recent market reactions to inflation news and find that longer-term inflation expectations appear to remain well anchored.
Working Paper
Did the Federal Reserve Break the Phillips Curve? Theory and Evidence of Anchoring Inflation Expectations
In a macroeconomic model with drifting long-run inflation expectations, the anchoring of inflation expectations manifests in two testable predictions. First, expectations about inflation far in the future should no longer respond to news about current inflation. Second, better-anchored inflation expectations weaken the relationship between unemployment and inflation, flattening the reduced-form Phillips curve. We evaluate both predictions and find that communication of a numerical inflation objective better anchored inflation expectations in the United States but failed to anchor expectations ...
Journal Article
Does the Recent Decline in Household Longer-Term Inflation Expectations Signal a Loss of Confidence in the FOMC?
Households have lowered their longer-term inflation outlooks, but they appear confident in the FOMC?s ability to achieve stable prices.
Journal Article
Introducing the Kansas City Fed's Measure of Policy Rate Uncertainty (KC PRU)
Monitoring uncertainty around the future path of interest rates can help ensure that monetary policy is transmitting to the economy as intended. Because uncertainty is not directly observable, measuring uncertainty about the future policy rate can be difficult. Previous measures often face two key limitations. First, they may be released with a lag, making them less useful as a timely measure of policy rate uncertainty. Second, they may not be available over a long sample, making it difficult to compare measures of current uncertainty with historical context.In this article, Brent Bundick, A. ...
Working Paper
Reconciling VAR-based Forecasts with Survey Forecasts
This paper proposes a novel Bayesian approach to jointly model realized data and survey forecasts of the same variable in a vector autoregression (VAR). In particular, our method imposes a prior distribution on the consistency between the forecast implied by the VAR and the survey forecast for the same variable. When the prior is placed on unconditional forecasts from the VAR, the prior shapes the posterior of the reduced-form VAR coefficients. When the prior is placed on conditional forecasts (specifically, impulse responses), the prior shapes the posterior of the structural VAR ...