Federal Reserve Board research finds policy rules that respond to long-run inflation expectations can strengthen inflation anchoring and mitigate effective lower bound risks

The Federal Reserve Board published a research paper assessing whether monetary policy rules that explicitly respond to long-run inflation expectations improve policy performance. The analysis concludes that incorporating such expectations into policy rules can reinforce inflation anchoring, reduce macroeconomic volatility tied to slow-moving inflationary forces, and lower risks associated with the effective lower bound (ELB). Using both a small model for intuition and a large-scale policy model for quantitative evaluation, the paper finds that this approach enhances stability and complements makeup strategies, with ELB risk mitigation operating through different channels. It also notes that, because central banks already emphasize inflation expectations in their communications, the strategy aligns naturally with existing policy discussions.