from the Minneapolis Fed
Inflation expectations have recently received increased interest because of the uncertainty created by the Federal Reserve’s unprecedented reaction to the Great Recession. The effect of this reaction on the real economy is also an important topic. Various surveys were analyzed to produce a term structure of inflation expectations – inflation expectations at any horizon from 3 to 120 months – and an associated term structure of real interest rates.
Inflation expectations extracted from this model track actual (ex-post) realizations of inflation quite well, and in terms of forecast accuracy they are at par with or superior to some popular alternatives obtained from financial variables. Looking at the period 2008–2013, I conclude that the unconventional policies of the Federal Reserve kept long-run inflation expectations anchored and provided a large level of monetary stimulus to the economy.