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• W2346057835 abstract "Persistently low price inflation, falling energy prices, and a strengthening dollar have helped push down market-based measures of long-term inflation compensation over the past two years. The decline in inflation compensation could reflect a lower appetite for risk among investors or decreased market liquidity. A third alternative supported by recent research suggests that the decline reflects lower long-term inflation expectations among investors. Projections indicate the underlying expectations will revert back to typical long-run levels only slowly. The Federal Reserve is charged with a dual mandate of achieving maximum employment and price stability. While employment has grown rapidly in recent years, price inflation has remained below the Fed’s stated goal of 2% annually. Policymakers have expressed confidence that inflation will return to its target in part because long-term inflation expectations reported in surveys of households and professional forecasters have remained close to that target during the recovery. In a speech last year, Fed Chair Janet Yellen (2015) described the crucial role of these expectations as a determinant of future inflation. In her remarks, Yellen noted that survey-based measures of long-term inflation expectations were steady around 2% and that inflation is likely to return to its well-anchored target once the economy returned to full employment. In contrast, market-based measures of long-term inflation expectations have been less stable. These measures of long-term inflation compensation reflect investors’ underlying long-term expectations as well as premiums for risk and market liquidity. Market-based measures have trended down over the past two years to about 1.6%. In this Letter, we estimate how much of this decline represents a downshift in longterm inflation expectations and how much reflects other factors. We use recent research by Christensen, Lopez, and Rudebusch (forthcoming, henceforth CLR) to correct for risk premiums and liquidity effects that can skew market-based measures. Our results suggest that long-term inflation expectations among financial market participants have in fact shifted down over the past two years. Furthermore, using a probability-based approach advocated by Christensen, Lopez, and Rudebusch (2015) to assess the outlook for investors’ long-term inflation expectations, we find that these expectations will take some time to revert back to target. However, given the model uncertainty involved in our analysis, exactly how long that will take remains an open question. Measures of long-term inflation expectations Monetary policy makers carefully monitor long-term inflation expectations to assess whether households and businesses view changes in inflation as permanent or transitory. One such market-based measure is breakeven inflation (BEI), which is the difference between the yield on a regular Treasury bond and that on a Treasury inflation-protected security (TIPS), each with the same maturity. TIPS principal and interest payments are indexed to changes in the consumer price index (CPI) to protect the real value of" @default.
• W2346057835 created "2016-06-24" @default.
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• W2346057835 date "2016-01-01" @default.
• W2346057835 modified "2023-09-26" @default.
• W2346057835 title "Differing Views on Long-Term Inflation Expectations" @default.
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