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November 9, 2022

Key Takeaways from President John Williams’s Speech on Anchoring Inflation Expectations

On Wednesday, November 9, 2022, New York Fed President John Williams discussed the importance of well-anchored inflation expectations at a conference on global risk, uncertainty, and volatility organized by the Swiss National Bank, the Federal Reserve Board, and the Bank for International Settlements.

He said:

“Against the backdrop of the stormy seas of the global inflation of the past year and a half, a steady anchor is more critical than ever.”

“The beneficial effects of anchored expectations on macroeconomic performance only occur when the inflation response to a shock is not expected to extend over many years.”

“The news is mostly good—longer-run inflation expectations in the United States have remained remarkably stable at levels broadly consistent with the [Federal Open Market Committee’s] longer-run goal.”

In his remarks, President Williams described three criteria for inflation expectations to be well-anchored: sensitivity, level, and uncertainty. The sensitivity criterion requires long-run inflation expectations to be invariant to shocks. The level criterion “applies the more stringent standard that the rate of long-run inflation expectations be consistent with the central bank’s long-run inflation target,” he said. And the uncertainty criterion requires that “uncertainty about future inflation increases less than linearly with the forecast horizon,” he said.

In assessing the three criteria against the period of high inflation that began in 2021, President Williams said short-run and, to a lesser extent, medium-run inflation expectations have risen with the sharp rise in inflation. However, measures of longer-run inflation expectations have remained broadly in line with the FOMC’s 2 percent inflation target. In addition, research suggests that households view the 2021 run-up in inflation “as likely being less persistent than in prior episodes,” he said.

President Williams also cited findings from a recent study that used data from the New York Fed’s Survey of Consumer Expectations, which demonstrated a divergence in views of future inflation expectations. The share of respondents who expect deflation—or inflation to be at or below zero percent within three or five years—has shown a striking increase over the past year. At the same time, the share of respondents who expect inflation to be above 4 percent also grew, although part of that increase has since reversed.

This divergence is also seen in the most recent reading of five-year inflation expectations. About a quarter of respondents expect deflation, and nearly that many expect inflation to be above 4 percent at the five-year horizon. President Williams called the divergence “one surprising wrinkle worth further study.”

At the outset of his remarks, President Williams said that the findings on inflation expectations should be considered an initial assessment.

“I should emphasize the word ‘initial,’” he said, “since we are still in the midst of the storm, and definitive conclusions on the anchoring of expectations will await the ship’s safe return.”

Read the full speech.

Judy DeHaven is an executive communications specialist at the New York Fed.

The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.


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