Loretta Mester, Speech: The Role of Inflation Expectations in Monetary Policymaking, A Practitioner’s Perspective

“Achieving “well anchored” in this sense would depend on how well the public understands the central bank’s inflation goal and how strongly it believes the central bank is committed to returning inflation to goal when it has deviated. This implies that central bank communications can play an important role in keeping inflation expectations anchored and, via this channel, communications can help to mitigate the persistence of shocks to inflation. It is important to note that if inflation expectations are stable but are well anchored at levels inconsistent with price stability, then they would be an impediment to achieving the inflation goal.”

“The current inflation situation is a very challenging one. Central banks will need to be resolute and intentional in taking actions to bring inflation down. The low inflation readings during the pre-pandemic expansion led to considerable research on how low equilibrium interest rates and the zero lower bound can create a downward bias to inflation and inflation expectations. The policy implication some drew from this research was that if policy had to err, it should err on the side of being too accommodative, since it would be easier to address high inflation than low inflation. The current challenging situation in which a sequence of supply shocks have contributed to inflation being at a 40-year high belies that view. It also calls into question the conventional view that monetary policy should always look through supply shocks. In some circumstances, such shocks could threaten the stability of inflation expectations and would require policy action. My hope is that just as the period of low inflation generated important research, the current period will generate new research to help the FOMC deliver on its commitment to price stability and maximum employment.”